WEBVTT - A Broken Market Is Causing Mortgage Rates to Surge 0:00:10.039 --> 0:00:13.520 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:13.560 --> 0:00:17.000 I'm Tracy Alloway and I'm Joe Wisnal. You know, Joe, 0:00:17.200 --> 0:00:20.000 we've been talking a lot about what higher interest rates 0:00:20.200 --> 0:00:22.880 mean for the housing market, and we had that really 0:00:22.960 --> 0:00:27.159 good episode with Morgan Stanley's housing strategist, Jim Egan. He 0:00:27.240 --> 0:00:30.840 walked us through a lot of the technicalities of the 0:00:30.880 --> 0:00:34.880 impact of higher rates on house prices. But I think 0:00:34.920 --> 0:00:38.320 we could get even more detailed. Well, absolutely, because we 0:00:38.440 --> 0:00:41.879 talked about what is the impact of higher rights on housing, 0:00:42.320 --> 0:00:44.640 but we didn't really talk about why have rates gone 0:00:44.680 --> 0:00:47.160 so much higher? And I know, like this is all 0:00:47.200 --> 0:00:50.080 I know about housing finance. I know the government like 0:00:50.159 --> 0:00:53.319 backstops a lot of or implicitly or explicitly actually I'm 0:00:53.320 --> 0:00:55.160 not even sure anymore, but backstops all a lot of 0:00:55.200 --> 0:00:59.440 it does it does even more. It's so like you 0:00:59.600 --> 0:01:02.200 start with like the sort of risk free rate on 0:01:02.360 --> 0:01:05.320 like treasuries because it's government, and then you add some 0:01:05.400 --> 0:01:08.040 spread and that's like the average more and then I 0:01:08.080 --> 0:01:10.520 don't know anything beyond that. Well, that's a fair question 0:01:10.520 --> 0:01:13.559 that where does that spread come from? Why do people 0:01:13.680 --> 0:01:17.039 make additional money or why do they demand an additional 0:01:17.080 --> 0:01:20.759 premium for investing that's in something that has a guarantee 0:01:20.800 --> 0:01:23.480 from the US government. Yeah, exactly right. This is the 0:01:23.520 --> 0:01:25.959 part I don't understand, Like, if the if the asset 0:01:26.080 --> 0:01:27.800 is backed by the US government, why don't we get 0:01:27.840 --> 0:01:30.520 mortgages the same rate as treasuries? But it's not because 0:01:30.600 --> 0:01:33.160 right now, a third year treasury somewhere on four percent 0:01:33.680 --> 0:01:36.959 and a third year mortgage is around seven percent. And 0:01:37.040 --> 0:01:39.520 that's spread various quite a bit from time to time. 0:01:39.560 --> 0:01:43.559 So even as recently is last spring, the gap between 0:01:43.560 --> 0:01:45.560 a mortgage and a treasury had gotten down to less 0:01:45.560 --> 0:01:48.080 than one percent. Now it's around three percent. Where did 0:01:48.120 --> 0:01:51.120 that spread come from? And why does it change over time? 0:01:51.240 --> 0:01:53.760 Or two things? I just don't know the answers right well. Also, 0:01:53.840 --> 0:01:56.400 that three percent spread is like at the highest that 0:01:56.480 --> 0:01:59.080 it's been I think of all times. So like something 0:01:59.160 --> 0:02:00.880 is happening in the mark it right now that is 0:02:00.960 --> 0:02:03.280 different to the way it used to work, and I 0:02:03.280 --> 0:02:05.080 think we need to dig into that. You know, we 0:02:05.120 --> 0:02:06.920 spoke a little bit with Jim about it, but we 0:02:06.960 --> 0:02:10.240 really need an expert. And I got to say I 0:02:10.280 --> 0:02:13.000 was sort of bated by there was a tweet recently 0:02:13.600 --> 0:02:16.000 It started with I'm not about to go on a 0:02:16.040 --> 0:02:19.720 podcast to explain why, but this year has likely broken 0:02:19.760 --> 0:02:22.560 the market for mortgage backed security. That was a dare time. 0:02:22.919 --> 0:02:24.240 It's like if he's like you did now, just like 0:02:24.320 --> 0:02:25.720 I'm not going to go on a podcast, It's like, 0:02:25.720 --> 0:02:27.640 all right, let's try us, let's see, let's see if 0:02:27.680 --> 0:02:30.400 you can resist. Okay, well, here is the podcast to 0:02:30.560 --> 0:02:33.960 explain why the MBS market seems to be broken. We 0:02:34.040 --> 0:02:37.000 are going to be speaking with really the perfect guest. 0:02:37.280 --> 0:02:41.480 We have Guillermo rodit Domingo's He is the managing director 0:02:41.560 --> 0:02:44.040 at New River Investments, and he is going to explain 0:02:44.080 --> 0:02:45.880 all of this to us in detail. One of our 0:02:45.919 --> 0:02:48.320 super fans, I think really, I think so. He's one 0:02:48.320 --> 0:02:51.000 of the first to tweet them often so and we've 0:02:51.040 --> 0:02:53.480 known him a long time. So very excited about this conversation. 0:02:53.480 --> 0:02:55.200 So maybe it wasn't a dare, or maybe it was. 0:02:55.480 --> 0:02:58.360 You know, please pick me for the podcast, Guermo. We 0:02:58.360 --> 0:03:00.799 are delighted to have you on. Really looking forward to 0:03:00.840 --> 0:03:04.520 the conversation. I am very very very happy to be honest. 0:03:05.120 --> 0:03:07.800 A bucket list item for me, and you know I 0:03:07.840 --> 0:03:10.640 do stay up until very late at night. So I 0:03:10.680 --> 0:03:13.600 can listen to you know, odd Lots and tweet out 0:03:13.600 --> 0:03:16.079 my notes before anybody else wakes up. I love that. 0:03:16.080 --> 0:03:18.880 That makes me happy. Okay, So why don't we start 0:03:18.880 --> 0:03:22.560 out with Here's a very simple premise, is the current 0:03:22.800 --> 0:03:25.720 moment in the mortgage market. And you know, when I 0:03:25.760 --> 0:03:28.679 say the mortgage market, I'm kind of talking about mortgage 0:03:28.720 --> 0:03:31.760 back securities a k A m b S. A lot 0:03:31.760 --> 0:03:33.720 of people will think back to you know, pre two 0:03:33.760 --> 0:03:36.360 thousand eight times and think of them in that context. 0:03:37.040 --> 0:03:40.320 But is this particular moment in the mortgage market different 0:03:40.760 --> 0:03:43.280 or remarkable in some way? Like, can you give us 0:03:43.280 --> 0:03:47.119 some historical context around what we're seeing right now? Yes, 0:03:47.400 --> 0:03:53.160 So this moment is special because it's not happening because 0:03:53.200 --> 0:03:55.200 people are afraid people are not going to pay their mortgages. 0:03:55.280 --> 0:03:57.680 Is them because people are afraid house pics it's going 0:03:57.720 --> 0:04:02.280 to go down. It's a common nation of the fact 0:04:02.360 --> 0:04:08.680 that mortgage backed securities went from being effectively short lived 0:04:08.680 --> 0:04:12.720 assets because we went through a pretty epic refinancing boom 0:04:13.000 --> 0:04:19.120 in two all of a sudden, rates going up, very 0:04:19.200 --> 0:04:23.320 very very quickly, faster than anybody expected, pre payments going 0:04:23.520 --> 0:04:26.520 effectively to zero, and a huge train on neutral funds 0:04:26.800 --> 0:04:30.320 from tax payments that we're do for games from counter year. 0:04:31.760 --> 0:04:35.040 That's you know, give or take one and a quarter 0:04:35.520 --> 0:04:39.400 trillion dollars. That's probably the highest compared to GDP that 0:04:39.480 --> 0:04:43.680 we've ever had. This kind of conspired to leave holders 0:04:43.720 --> 0:04:48.440 of mbs holding securities that have a much longer expected 0:04:48.480 --> 0:04:51.920 life than than they ex than they originally expected when 0:04:51.920 --> 0:04:54.599 they purchased them, and you know, the discount rate on 0:04:54.839 --> 0:04:58.440 that longer life going up, which has been pretty disastrous 0:04:58.480 --> 0:05:02.200 to the prices of this product. This gets to an 0:05:02.200 --> 0:05:05.919 important nuance or an important thing. A person buys a 0:05:05.960 --> 0:05:08.880 house and it takes out a thirty year fixed mortgage. 0:05:08.920 --> 0:05:11.599 Let's start really simple. They get a thirty year fixed mortgage. 0:05:11.880 --> 0:05:15.680 Someone owns that asset, but their expectation is not that 0:05:15.720 --> 0:05:19.000 they're going to hold that for thirty years. They're not 0:05:19.080 --> 0:05:22.080 thinking like, Okay, I'm gonna wait thirty years. What is 0:05:22.400 --> 0:05:27.680 the typical length via which that asset exists? How frequently 0:05:27.800 --> 0:05:31.200 in normal times would it either get refinanced by the 0:05:31.240 --> 0:05:34.640 homeowner or sold because the homeowner sells the house and 0:05:34.760 --> 0:05:38.560 the loan gets paid back automatically. On a basic on scenario, 0:05:39.040 --> 0:05:41.479 you would assume that you have a thirty year mortgage 0:05:41.600 --> 0:05:44.400 transit weighted average life of the castles, because it's an 0:05:44.400 --> 0:05:48.760 advertising a loan of about you know, fifteen years, and 0:05:49.040 --> 0:05:52.279 we have some expectation of turnover. You know, people move, 0:05:52.680 --> 0:05:55.800 you know, people sell, sell their houses, or prepay their 0:05:55.800 --> 0:05:58.880 loans for many different reasons, all sorts of life events, 0:05:59.720 --> 0:06:03.200 and you know that shortens the effective life to you know, 0:06:03.279 --> 0:06:05.240 about half of that about seven years. And usually we're 0:06:05.240 --> 0:06:08.560 assuming anywhere between six and eight percent of loans on 0:06:08.600 --> 0:06:12.760 an annual basis transition, not because they are refinanced to 0:06:13.200 --> 0:06:16.919 their being a rave incentive, but from any other number 0:06:16.920 --> 0:06:22.360 of reasons. During one we saw about thirty six percent 0:06:22.880 --> 0:06:26.719 of loan balances being extinguished each year. That's a lot, 0:06:26.920 --> 0:06:29.279 you know, Usually, you know we're expecting about half of 0:06:29.320 --> 0:06:33.640 that sixteen. You'll recall in the first three course of 0:06:33.640 --> 0:06:35.760 the year we had pretty low rates and we got 0:06:35.800 --> 0:06:37.839 up to twenty and that was that was pretty high. 0:06:38.240 --> 0:06:40.520 And you know t n which was a more normal year, 0:06:40.600 --> 0:06:43.279 we were at out seventeen. So you know, this fueled 0:06:43.440 --> 0:06:46.440 a lot of extinguished singing over those balances, and you know, 0:06:46.520 --> 0:06:51.040 you you bought what you thought was a seven year asset, 0:06:51.360 --> 0:06:53.400 and you know, it turned out that it was, you know, 0:06:53.920 --> 0:06:57.960 a five year asset, and then happens and all of 0:06:58.000 --> 0:07:00.440 a sudden, you know, you're holding a ten year asset, right, 0:07:00.560 --> 0:07:02.480 So can we dig into this just a little bit 0:07:02.480 --> 0:07:05.440 more because I seem to remember during the era of 0:07:05.560 --> 0:07:09.080 low interest rates, so you know, after two thousand and eight, 0:07:09.200 --> 0:07:12.120 when rates were just grinding lower and lower and lower, 0:07:12.560 --> 0:07:16.000 the big investors in MBS, the big buyers, and we 0:07:16.000 --> 0:07:18.640 should probably talk about who those actually are. At some point, 0:07:18.920 --> 0:07:22.760 they didn't want MBS to be prepaid because it basically 0:07:22.840 --> 0:07:24.840 meant that they would get like a bunch of money 0:07:24.880 --> 0:07:28.040 that they then had to invest at even lower interest rates. 0:07:28.680 --> 0:07:32.200 Now we're in an environment of higher rates, and it 0:07:32.280 --> 0:07:36.720 feels like MBS is not desirable because suddenly it leaves 0:07:36.760 --> 0:07:40.160 you with an asset that has much longer duration than 0:07:40.200 --> 0:07:44.280 you expected and much more exposure to interest rate volatility. 0:07:44.400 --> 0:07:48.480 Is that right? Yeah, that's correct. I think one way 0:07:48.640 --> 0:07:52.680 to look at it is a mortgage backed security is 0:07:53.240 --> 0:07:57.040 essentially similar to a covered call in equity terms. That 0:07:57.080 --> 0:07:58.880 means that you know you have all of the downside 0:07:59.080 --> 0:08:01.520 and you know very very little of the upside and 0:08:01.520 --> 0:08:03.560 you trade that in for a little bit of extra coupon. 0:08:03.880 --> 0:08:07.280 And you know, when rates were going down, everybody was 0:08:07.320 --> 0:08:10.040 upset about it because you know, treasury bonds were going 0:08:10.080 --> 0:08:11.640 up and frist people are making money there. If you 0:08:11.760 --> 0:08:13.880 have the NBS, you know you've got your money back, 0:08:13.880 --> 0:08:15.920 and then you want to buy new bonds. You know 0:08:16.000 --> 0:08:18.320 you bought them at a lower yield. And right now 0:08:18.360 --> 0:08:22.000 what we're seeing is all of a sudden, bond prices 0:08:22.040 --> 0:08:24.720 are are going down, the yields are going up, and 0:08:25.040 --> 0:08:27.120 you know you're not getting any castles, so you don't 0:08:27.120 --> 0:08:29.360 get to reinvest the money. This is sort of a 0:08:29.480 --> 0:08:31.560 key thing, and I just want to like make it clear. 0:08:31.600 --> 0:08:35.680 You know, everybody knows that a homeowner can always like 0:08:35.720 --> 0:08:38.360 refinance their home, and people talk about like homeowners a 0:08:38.480 --> 0:08:40.880 third year fixed has like a quote like free option 0:08:41.400 --> 0:08:44.400 to refinance their home if rates go down after them. 0:08:44.480 --> 0:08:48.040 But essentially that free option for the homeowner is a 0:08:48.080 --> 0:08:52.760 theoretical source of risk for the holder of the NBS. 0:08:52.800 --> 0:08:55.640 So there's two ways for the MBS holder to lose. It. 0:08:55.679 --> 0:08:58.320 Sounds like one is, Okay, rates go up a lot 0:08:58.400 --> 0:09:01.160 and then you're not getting much payment done those bonds 0:09:01.360 --> 0:09:04.240 or ready to go down and then you have to like, 0:09:04.400 --> 0:09:07.360 you know, eat that repayment. Yeah, and I mean I 0:09:07.360 --> 0:09:12.000 would say that it's not a pre option. It's an 0:09:12.000 --> 0:09:15.720 expensive option. Not always, but right now it is. We're 0:09:15.760 --> 0:09:20.760 talking about why our mortgages at you know, seven plus 0:09:21.200 --> 0:09:25.600 when you know treasuries are at four. You know, just 0:09:26.160 --> 0:09:30.240 a year ago, treasuries were two and fifty basis points lower, 0:09:31.120 --> 0:09:35.400 but mortgages were basis points lower. Maybe this is a 0:09:35.400 --> 0:09:37.760 good moment to sort of step back and talk about 0:09:37.800 --> 0:09:41.559 who the big buyers of mortgage backed securities actually are. 0:09:41.640 --> 0:09:45.040 And one thing I would be curious to hear is 0:09:45.160 --> 0:09:48.840 have they changed from pre two th eight to now? 0:09:48.960 --> 0:09:52.000 Because of course, I mean the big change has been 0:09:52.120 --> 0:09:55.560 the Federal Reserve when it started quantitative easing. You know, 0:09:56.040 --> 0:09:58.480 it bought a whole bunch of different types of bonds, 0:09:58.520 --> 0:10:01.160 but one of those was NBA. Now that they're in 0:10:01.400 --> 0:10:04.560 quantitative tightening mode, they've sort of stepped back from the market. 0:10:04.640 --> 0:10:06.440 So could you maybe talk a little bit about the 0:10:06.480 --> 0:10:10.480 ecosystem of who actually purchases these securities and the kind 0:10:10.480 --> 0:10:13.920 of considerations that they're thinking about as they decide whether 0:10:14.000 --> 0:10:18.120 or not to buy more or less MBS. The answer 0:10:18.120 --> 0:10:19.600 that nobody wants to tell you is that right now 0:10:19.600 --> 0:10:23.320 there's no natural buyers right you know, and that's that's 0:10:23.320 --> 0:10:25.640 the problem. You see these spreads go really wide. The 0:10:25.679 --> 0:10:28.040 problem is that who is the buyer right now? Right now, 0:10:28.080 --> 0:10:31.640 there is no natural buyers. Postal thousand and eight, you 0:10:31.760 --> 0:10:35.800 had you know, banks that had expanding deposits and you know, 0:10:35.840 --> 0:10:39.080 there was not to no loan growth, and so banks 0:10:39.120 --> 0:10:44.680 kind of building that gap with MS. Bonds funds had 0:10:44.880 --> 0:10:47.920 you know, pretty sizable inflows. And when you think about 0:10:47.920 --> 0:10:50.360 bond funds, you know you're thinking about like people goes 0:10:50.400 --> 0:10:54.040 total return fund or you know double lens total return fund. 0:10:54.480 --> 0:10:58.240 These are these are funds that engage in you know, 0:10:58.840 --> 0:11:01.880 marginal risk ging in a liquid securities in order to 0:11:01.920 --> 0:11:04.800 boost the yield of their fund. And you know, as 0:11:04.800 --> 0:11:08.200 long as you keep that a liquid portion to a 0:11:08.240 --> 0:11:12.199 small percentage of the fundacets, you know, you can enhance 0:11:12.240 --> 0:11:16.240 the yield for for the whole fund. Ever since the 0:11:16.280 --> 0:11:18.480 start of the year, you know, bond funds have been 0:11:18.640 --> 0:11:21.760 seeing weekly outflows, so there are certainly not buyers there. 0:11:21.880 --> 0:11:24.760 You know, the Federal Reserve is not a buyer. Banks 0:11:25.000 --> 0:11:28.280 have demand for loans and managers at banks. You know, 0:11:28.280 --> 0:11:30.839 I thought that they were ready for the risk that 0:11:31.000 --> 0:11:34.160 extension of MBS would entail, and it terms out that 0:11:34.240 --> 0:11:37.360 you know, maybe they don't like it so much, so 0:11:37.760 --> 0:11:39.640 they're not buyers of the product. We used to have 0:11:39.720 --> 0:11:43.240 a pretty healthy demand for some of the cash flows, 0:11:43.280 --> 0:11:46.040 particularly the more longer dated cash flows. There you would 0:11:46.080 --> 0:11:49.520 get into you know, transition, but you'd have some demand 0:11:49.559 --> 0:11:54.080 for that stuff from buyers in Asia, and they're in 0:11:54.080 --> 0:11:57.960 over to be seen. And because of this prepayment risk, 0:11:58.280 --> 0:12:01.600 it's a very poorfeit for people that are in the 0:12:01.640 --> 0:12:04.920 business of matching assets and liabilities because you know, if 0:12:04.960 --> 0:12:07.040 you're in the business and matching assets and liabilities, you 0:12:07.040 --> 0:12:09.479 don't want your asset to get called because the liability 0:12:09.520 --> 0:12:12.040 is not getting called. So you know, it's a nonstarter 0:12:12.200 --> 0:12:15.559 for them, very very few people who want to start. 0:12:32.080 --> 0:12:35.120 Can we just go back on prepayment risk specifically, And 0:12:35.160 --> 0:12:37.839 you made a good point that this option that homeowners 0:12:37.880 --> 0:12:40.440 have to refinance, it's not a free option. They pay 0:12:40.520 --> 0:12:42.840 for it and the spread and that's spread is wide, 0:12:42.880 --> 0:12:46.160 so just you know, seven percent mortgages four percent treasuries, 0:12:46.200 --> 0:12:49.440 you're actually paying a significant amount to borrow that money 0:12:49.600 --> 0:12:52.520 is part of what investors are concerned about, or is 0:12:52.559 --> 0:12:56.040 part of why that option is so expensive right now, 0:12:56.360 --> 0:12:59.480 simply because there is concerned that like, Okay, there's the 0:12:59.559 --> 0:13:03.400 spike rates due to the fight inflation, that's kind of temporary, 0:13:03.440 --> 0:13:06.560 and that rates might you know, reset lower significantly in 0:13:06.600 --> 0:13:08.720 a couple of years, and that we get this huge 0:13:08.760 --> 0:13:12.319 wave of like everyone who can refinances then. So it's 0:13:12.320 --> 0:13:14.360 like if you're you know, if I'm buying a home 0:13:14.440 --> 0:13:17.640 right now, I'm probably thinking, well, I really get I 0:13:17.679 --> 0:13:20.000 really hope this's like inflation fight ends in a couple 0:13:20.000 --> 0:13:23.600 of years and that I can like refinance or something. 0:13:23.760 --> 0:13:27.080 That's exactly right. Nobody wants to take their money at 0:13:27.120 --> 0:13:29.840 this point. You know, if you've had cash up until now, 0:13:30.760 --> 0:13:33.679 you know you've done very well versus the losses that 0:13:33.760 --> 0:13:36.440 you know, everything else has taken. So if you're going 0:13:36.480 --> 0:13:39.680 to put money to work now, why are you going 0:13:39.720 --> 0:13:42.440 to put it into an asset that you know that 0:13:43.000 --> 0:13:46.160 may have capped upside? For most people, it's it either 0:13:46.240 --> 0:13:48.880 doesn't make sense or it's just not something that they're 0:13:48.920 --> 0:13:51.480 willing to consider. You know, if rates go down and 0:13:51.720 --> 0:13:55.040 you buy treasuries, you're gonna make up boatload of money. 0:13:55.679 --> 0:13:58.120 If rates go down and you buy MBS, you might 0:13:58.120 --> 0:14:01.319 not make any money. Can you talk about like whether 0:14:01.480 --> 0:14:05.600 or not there are forced buyers or buyers who have 0:14:05.840 --> 0:14:09.440 to buy MBS. And I'm thinking specifically of, you know, 0:14:09.520 --> 0:14:13.040 situations where you might have a bond fund that's benchmarked 0:14:13.160 --> 0:14:16.360 to a benchmark index, something like the Bloomberg Barkley's AGG 0:14:16.520 --> 0:14:19.920 or something like that. And I seem to recall there 0:14:20.000 --> 0:14:23.560 was some discussion again in the mid two thousands that 0:14:23.720 --> 0:14:27.080 it was unfair that the Barkley's index still included a 0:14:27.120 --> 0:14:31.120 bunch of MBS when there wasn't actually that much MBS 0:14:31.160 --> 0:14:33.880 in the market because the FED was buying it, and 0:14:34.040 --> 0:14:36.240 MBS was a source of duration for a lot of 0:14:36.240 --> 0:14:39.200 the funds, and if they couldn't, you know, buy MBS, 0:14:39.280 --> 0:14:41.400 and they couldn't be as exposed to duration as the 0:14:41.440 --> 0:14:44.560 benchmark index. And so you had people like Pimco actually 0:14:44.600 --> 0:14:47.920 complaining that there wasn't enough MBS in the market. So 0:14:48.000 --> 0:14:50.560 it's kind of ironic that fast forward, you know, seven 0:14:50.640 --> 0:14:53.680 years or something, and a lot of these big buyers 0:14:54.040 --> 0:14:57.040 don't want to touch MBS with a ten foot poll 0:14:57.160 --> 0:15:00.640 after complaining that, you know, they couldn't get enough of it. 0:15:01.000 --> 0:15:04.360 Anybody that tracks an index is not gonna be necessarily 0:15:04.520 --> 0:15:07.080 a forced fire because the funds that track an index 0:15:07.440 --> 0:15:11.920 don't necessarily replicate it down to every single line item. 0:15:11.960 --> 0:15:14.720 That's you know, incredibly difficult to do. In fix sincom, 0:15:14.760 --> 0:15:17.640 where you know, you're talking about tens of thousands or 0:15:17.720 --> 0:15:20.840 hundreds of thousands of different bonds, and especially in NBS 0:15:20.880 --> 0:15:25.360 where you don't have a fungible product, you know, there's 0:15:25.760 --> 0:15:28.360 you know, thousands of thousands of pools that are packaged 0:15:28.400 --> 0:15:31.840 in different ways, and dealers will often sell you know, 0:15:32.280 --> 0:15:35.120 the entirety of an issuance to a single buyer, and 0:15:35.160 --> 0:15:38.360 so there's no chance for anybody to really replicate It's 0:15:38.400 --> 0:15:41.760 it's impossible to replicate an index, and so you know, 0:15:41.840 --> 0:15:45.880 you have some leeway around that. And sure there's you know, 0:15:46.000 --> 0:15:48.320 there's flows going into index trackers that are going to 0:15:48.440 --> 0:15:51.280 replicate that, but there's also a lot of funds leaving, 0:15:51.680 --> 0:15:55.480 you know, a lot of flows out of different products 0:15:55.520 --> 0:16:01.160 that are more heavily exposed two mbs and I wouldn't 0:16:01.200 --> 0:16:04.400 be thinking about four spires. I'm thinking about four sellers. Sorry, 0:16:04.400 --> 0:16:06.720 Can you expand on that point a little bit more 0:16:06.760 --> 0:16:09.840 like what would trigger a for sale of MBS. Let's 0:16:09.840 --> 0:16:13.960 say you know you have uh total return fund at 0:16:14.200 --> 0:16:17.640 at a large manager, you know, well known large manager, 0:16:17.680 --> 0:16:20.560 and you're participating in the MBS market. Is that way 0:16:20.560 --> 0:16:23.160 you can get some extra spread for your clients and 0:16:23.200 --> 0:16:24.760 you can get them, you know, a little bit of 0:16:24.760 --> 0:16:28.360 a higher return. And all of a sudden, starting this year, 0:16:28.400 --> 0:16:31.840 you start getting massive outflows. And maybe you keep I 0:16:31.840 --> 0:16:34.840 don't know, five or ten percent of your assets in 0:16:35.000 --> 0:16:37.800 super liquid securities and that's going to be bills and 0:16:37.800 --> 0:16:40.680 and one your treasuries or you know, to year notes, 0:16:41.680 --> 0:16:45.080 and all of a sudden, outflows keep coming. You run 0:16:45.080 --> 0:16:47.880 through your bills, you run through your one year notes, 0:16:48.320 --> 0:16:50.920 you know, you run through your two year notes, and 0:16:50.960 --> 0:16:55.040 all of a sudden, you know, you're pre payments, which 0:16:55.080 --> 0:16:57.560 you know, we're coming in every month, and you were 0:16:58.080 --> 0:17:00.640 cash flowing a lot from from those pre payment some nbs, 0:17:00.680 --> 0:17:03.760 all of a sudden they totally stopped. So you you 0:17:03.840 --> 0:17:07.119 have outflows, you have no cash flow coming in, Well, 0:17:07.200 --> 0:17:09.840 you're gonna have to sell something. And you know, unfortunately 0:17:09.960 --> 0:17:13.480 for for many managers, we've been seeing since about March, 0:17:13.920 --> 0:17:17.320 you know, kind of a relentless number of We call 0:17:17.400 --> 0:17:20.320 them be wicks since for bids wanted in competition, it's 0:17:20.400 --> 0:17:23.919 essentially when you option off your bonds to the highest bidder. 0:17:24.080 --> 0:17:25.600 And you know, we've seen that a lot of these 0:17:25.600 --> 0:17:31.440 options bring few or no participants. We have this period 0:17:31.440 --> 0:17:33.879 of high inflation, so of course there's a lot of 0:17:33.880 --> 0:17:36.360 second guessing about all kinds of policies that we're going 0:17:36.359 --> 0:17:42.280 on in one etcetera, fiscal, monetary, etcetera. And one of 0:17:42.320 --> 0:17:45.399 the criticisms of like why was the FED still buying 0:17:45.720 --> 0:17:49.360 you know, mortgage backed securities up until you know, relatively 0:17:49.560 --> 0:17:53.960 recently in your view, can we quantify the degree to 0:17:54.119 --> 0:17:57.840 which that FED buying depressed spreads? Or to put it 0:17:57.840 --> 0:17:59.679 in another way, like, okay, we have this, you know, 0:17:59.720 --> 0:18:04.080 this represent spread between mortgages and treasuries. Can we, like 0:18:04.160 --> 0:18:06.840 I can we decompose, like how much of that can 0:18:06.920 --> 0:18:10.320 just be explained via the FEDS switching from being a 0:18:10.320 --> 0:18:12.760 buyer to a seller of these assets. I can give 0:18:12.800 --> 0:18:15.439 you my best estimate, and so that would be for 0:18:16.119 --> 0:18:19.120 when you're talking about calendar year, I would say about 0:18:19.760 --> 0:18:25.600 to thirty basis points was from you know, QUI continuing 0:18:25.680 --> 0:18:29.399 maybe later than we needed to, we don't have a 0:18:29.440 --> 0:18:33.560 counterfactual of no que to look at. And if we 0:18:33.640 --> 0:18:36.400 look at before their great financial crisis for that kind 0:18:36.400 --> 0:18:39.640 of counter factual, well, the market was a lot, there 0:18:39.680 --> 0:18:45.200 was a lot more private label and bs, the implicit 0:18:45.240 --> 0:18:48.800 guarantees were maybe a little bit less implicit, and there 0:18:48.960 --> 0:18:52.320 was less market share dominated by Jinny May, which is 0:18:52.320 --> 0:18:55.400 obviously an explicit guarantee. But I would say that if 0:18:55.400 --> 0:18:58.399 you wanted to compare to you know, the FED not 0:18:58.480 --> 0:19:01.840 intervening at all, I think fifty basis points is not 0:19:02.640 --> 0:19:05.880 a bad guess, but you know, versus scenario, I would 0:19:05.880 --> 0:19:08.439 say about twenty five basis points. That's that's how much 0:19:08.720 --> 0:19:11.719 the depressive spread. Can you talk a little bit more 0:19:11.960 --> 0:19:15.560 about what's going on with the banks? So they're a 0:19:15.600 --> 0:19:19.320 big buyer of mbs, as you mentioned, and I've seen 0:19:19.440 --> 0:19:22.199 some discussion, you know, for instance, JP Morgan had a 0:19:22.240 --> 0:19:25.120 note a couple of weeks ago talking about how leverage 0:19:25.520 --> 0:19:30.200 and risk capital requirements for the big banks basically makes 0:19:30.200 --> 0:19:34.400 it much more difficult for them to hold onto these assets, 0:19:34.400 --> 0:19:36.720 to hold onto mbs, and so they haven't been buying 0:19:36.720 --> 0:19:39.080 as much of them, and that's one reason why that's 0:19:39.080 --> 0:19:42.880 spread between benchmark rates i e. Treasuries and mortgage rates 0:19:42.920 --> 0:19:46.120 has been going up. Is that a valid analysis or 0:19:46.280 --> 0:19:50.040 is this another excuse for big banks to complain about 0:19:50.119 --> 0:19:54.720 various regulatory requirements. I think it's a valid criticism. I 0:19:54.720 --> 0:19:57.520 think it was just last week or pride of that 0:19:57.600 --> 0:19:59.640 to them and said that, you know, they don't want 0:19:59.640 --> 0:20:04.240 any aret of the conforming mortgage space, but they're not 0:20:04.680 --> 0:20:08.960 participating that at all. Currently. The capital requirements they don't 0:20:09.000 --> 0:20:12.119 make it prohibitive for banks to participate. It just means 0:20:12.160 --> 0:20:16.840 that if they have demand for loans, well that's more 0:20:16.880 --> 0:20:19.840 attractive to them, and so they're not going to participate 0:20:19.880 --> 0:20:23.560 in something that is like relatively less attractive. You know, 0:20:23.600 --> 0:20:27.240 if they can originate a lot of personal loans were 0:20:27.320 --> 0:20:32.680 not conforming loans or credit to their their corporate borrowers, 0:20:32.920 --> 0:20:36.320 they're probably going to focus on those activities instead of 0:20:36.560 --> 0:20:39.919 you know, buying mbs. The other part of it is 0:20:39.960 --> 0:20:46.760 that everybody kind of assumed a certain base level of 0:20:46.800 --> 0:20:54.159 prepayments that in retrospect was not sustainable. I don't want 0:20:54.160 --> 0:20:56.960 to say sustainable, but you know, everybody kind of assumed 0:20:56.960 --> 0:20:59.359 that there will be a flour like that even if 0:20:59.480 --> 0:21:03.680 rates went out pre payments wouldn't decline past a certain point, 0:21:03.760 --> 0:21:07.080 and they did, and maybe you bought a bond and 0:21:07.080 --> 0:21:09.240 you thought, well, worst case scenario, rates go up, and 0:21:09.240 --> 0:21:11.440 then you know the duration of it. You know, it 0:21:11.480 --> 0:21:14.760 goes from from three years to five years, and you know, 0:21:14.800 --> 0:21:16.760 it turns out that now you're looking at six and 0:21:16.880 --> 0:21:18.800 you know, you thought you would be comfortable with five, 0:21:18.920 --> 0:21:20.640 but it turns out that you don't feel so comfortable 0:21:20.680 --> 0:21:22.920 with five, and now you have six on top of it, 0:21:23.520 --> 0:21:27.439 you know, And so there's just a general lack of 0:21:27.680 --> 0:21:31.080 appetite for this. And you see this a lot. I mean, 0:21:31.560 --> 0:21:33.760 you know managers and banks that are just you know, 0:21:33.960 --> 0:21:37.520 normal people, and they have the same biases and reactions 0:21:37.520 --> 0:21:39.000 as all of us. And you know, you get you 0:21:39.040 --> 0:21:40.800 get burned by something you don't want to do it again, 0:21:41.240 --> 0:21:44.119 and they just got burned by the extension risk of them. Yes, 0:21:44.520 --> 0:21:48.480 in the intro, since you mentioned the difference between conforming 0:21:48.560 --> 0:21:51.520 and nonconforming loans, and in the intro, I was like, wait, 0:21:51.560 --> 0:21:54.040 you like Fanny and Freddie still exist because I kind 0:21:54.040 --> 0:21:56.159 of forgot about them and tratically like give me like 0:21:56.160 --> 0:21:58.879 a really like me and look like what it is? 0:21:58.920 --> 0:22:00.879 What I mean, I just roll my eyes. She was 0:22:01.760 --> 0:22:04.160 she was surprised that her co host could say something 0:22:04.200 --> 0:22:06.160 so stupid, like do Fanny and Freddy? But I actually 0:22:06.200 --> 0:22:07.840 don't know what's going on with them because I just 0:22:08.119 --> 0:22:10.159 they're like penny stocks now and I don't really know 0:22:10.200 --> 0:22:12.800 what happened. So could you talk a little bit about 0:22:12.840 --> 0:22:15.720 like what they do now? Like what is their role? 0:22:15.840 --> 0:22:18.920 How big is the difference between the conforming versus nonconforming? 0:22:19.000 --> 0:22:22.680