Driving Mortgage Market Profitability: Insights from Mike Vough | March 2025 Data

MA Intro: 00:01:07

Welcome to Market Advantage, the monthly podcast from Optimal Blue. Tune in for valuable insights from the Market Advantage mortgage data report and in depth conversations with industry experts.

Stay competitive and optimize your advantage in the ever evolving mortgage landscape.

Olivia DeLancey: 00:01:26

Hello and welcome to the Market Advantage podcast. Brennan and I are really excited about this month's episode because we actually have one of our own from Optimal Blue.

Joining us as our guest, we have Mike Vough, head of corporate strategy. He's a fellow fan of mortgage data and market analysis and also a fellow Big Ten alum. Mike, welcome.

Mike Vough: 00:01:49

Thanks for having me. I'm a Penn State alumnus. I'm so excited about how many Lions finished out last year in the College Football Playoff.

Really excited for this year or this upcoming year. And honestly, I'm just so excited to be in the podcast.

I've been patiently waiting for somebody to invite me on an Optimal Blue podcast and, you know, you guys got me first, so I'm excited to come here and talk about the recent market trends with y'all.

Brennan O'Connell: 00:02:13

Yeah, Mike, I've been asking Olivia if we could bring you on for some time, and she's. She's pushed me off. But I think a couple of the publications you've gotten done recently finally, finally got her over the edge.

You know, typically with these, you know, we have kind of like two segments where we run through the data and then we do a guest interview. I think we're going to kind of blend them together, having you on, and we've got the benefit of working together, you know, the data very well.

So as we run through kind of the data recap here for March, would love for you to interject with your intel and then we'll move into some other topics, which I know we're really eager to talk to you about.

Mike Vough: 00:02:52

Sounds great. I'm excited to get into it.

I feel like this is going to turn into like one of our, like, planning meetings just being recorded live for the universe to see. So it should be exciting.

Brennan O'Connell: 00:03:01

That's dangerous. Going to have to be a lot of editing. Might as well just jump right in here. The story with March, I think, is a generally positive one.

We were pulling the numbers this morning. March volumes rate lock volumes were up 24%. You have seasonal tailwinds in the spring buying market. So purchase volumes were up 21%.

And then rate in termination and cash out refis also jumped 52 and 20% respectively here. We're in a better rate environment today than we were 60 days ago.

And so you're seeing a lot of folks take advantage and get their rates a little bit lower than they were. So the sharp increase in the refi activity also did push the refinance level to about 25% in total. So 75% purchase, 25% refi.

The borrowers who've taken out rates at that 7 plus percent rate over the last few years really do seem to be pretty responsive to even modest improvements in the rate environment, which I think is really important to note for originators to remember that that is still a part of the playbook and that you should be actively reaching out to clients. There are still refinance opportunities out there, despite us sitting maybe 3, 3 percentage points higher than we were in the the COVID era.

On the purchase side, the month over month numbers looked good. Unfortunately, the year over year numbers continue to disappoint.

now the full full quarter of: 2025

But: 2025

So what it means is that we really haven't found a floor in the purchase market. Obviously we will here at some point. Hopefully that's sooner than later.

But for now we're still kind of waiting to find that floor for purchase volume. Hopefully as we get into the summer buying season, we continue to see improvement there.

And then I think just to kind of put a pin in where we were from a rate perspective, the story in March was really one of kind of maintaining our consistent level. That started at the end of February. There was a rally that drove rates down.

Our conforming rate finished the month actually exactly where it ended, February. So it was at 6.6%. So we're at this kind of like 6 and 5/8 level.

And it there was some movement up and down in March, but for the most part rates stayed level. FHA rates did end up dropping a modest 8 bips to just about 6 and a quarter. And VA and jumbo rates rose 3 and 4 bips to 6.13 and 6.73% respectively.

But again, kind of across the board fairly level rate environment. And given that rally at the end of February, it was a rate environment that was fertile ground for refinances.

So I think you saw a more advantageous rate environment in March than we had in the last couple of months.

Mike Vough: 00:06:24

Yeah, just some really interesting trends to note there. One of the things that we track here at optimal Blue is something called a primary secondary spread.

And that is meant to be the difference between the retail rate or what we see locked in the industry.

OBMMI is a great index that captures that and the secondary rate or where we see, you know, mortgage backed securities trade in that secondary market. And historically you usually see that spread somewhere in that one and a quarter range.

And what we saw at the beginning of the year when OBMI was closer to 7 and an 8 was that spread was about 90 basis points. So as rates have gone down and they're in that 6 and 5, 8 category that Brennan called out, we're actually closer to 110 basis points.

So we're getting back closer to a world where, you know, we're seeing a higher profitability on a low level basis for lenders, but it's still nowhere near historic. Like mean like when I was know, you go back five or ten years ago, everybody grounded themselves to that 125 primary secondary spread.

then went down into like the: 7880

That like spread effectively is like the slack that lenders have from a capacity standpoint.

So as rates go down, you see that spread widen because they may not have enough processors to actually get through, through the stack of applications that they have. And then you see the inverse and moments when rates are going up, they have more excess capacity.

They have folks sitting around who may not be doing as much as they can so they can get more aggressive on a pricing standpoint. So it's a really interesting kind of like dichotomy there between rates going up and down and that spread contracting or widening out.

Brennan O'Connell: 00:08:16

Yeah, sort of moves inverse with where the bond market's going to move. And so hopefully for everybody's sake, we see continuing widening of that spread and a little bit of rate relief for our originators.

Mike Vough: 00:08:28

Those counter moves are why the OBI future in our partnership with the CME is so, so important. It's a, it's a super hard thing to hedge without an instrument like that. So I had to get, I felt compelled.

I had to get in and get in and give that plug.

Brennan O'Connell: 00:08:43

I appreciate it. Usually I do my best to, to drop it in when I'm talking through rates and I missed it this one. So appreciate the plug for our friends at the CME too.

I got a few more odds and ends here and would love to get your perspective on some of this here Mike as well.

I know you're physically located in dc, but I know you have maintained a really strong relationship with the agencies and folks who are closer to this and maybe prognosticating on where they think things are going to go here from an administrative perspective with the agencies and what role they will play going forward. One of the interesting dynamics we've seen this wasn't new in March although it it sort of continued on.

The same trend was a decrease in the share of production that was GSE eligible. So the conforming volumes dropped again.

They're down to 51% of all of the volumes that we are seeing through the platform and the majority of that decline was sort of assumed by the non conforming or non agency share jumbo and non QM bucket which are now up to just under 17% of all the volume we're seeing. FHA also fell off a little bit.

I think it peaked in kind of like the low 20s in terms of percentage towards the end of last year and now we're down below 20% for FHA share. So just kind of an interesting shift here.

I think there's a lot of talk about what is this administration going to do with the agencies and how is that going to impact production. So we'd love to get your perspective on that Mike.

And one other point that I just add in here as an interesting note is we did see average loan amount tick up quite a bit in March. Not unsurprising given this time of year. Kind of the spring buying season, you see folks jumping in.

I think you also see higher refinance activity probably as I mentioned, some of that non conforming lending that's a lot of times like jumbo loans. So you see more jumbo loans in the mix here. Not surprising that it would push up the average loan amount here.

So we saw that jump from three about 380k to just above 390,000. Really kind of crazy that we're talking about average loan amounts being almost $400,000. I know you were looking at some of the data.

e were we in the beginning of: 2024

Mike Vough: 00:11:09

Yeah, it's actually quite, it's quite interesting.

A while back when I was trading more on the desk you would see folks like the agencies or broker dealers pay up or pay more in relationship to a quote unquote normal mortgage for loans under 200k.

And the idea being, hey, that loan amount is smaller than on average and the closing cost would, would outweigh any potential refi savings because you're paying 10, 15k of closing costs. And to actually recoup that on a less than 200k loan amount has to be a material move in rates.

Well now we're starting to see that for loans that are less than or equal to $300,000 and so you're seeing folks looking for that prepay protection in larger loan amounts. And then you can counter that with what you mentioned about what we're seeing in the share of non agency loans going, growing.

You know, there are, you know, metro areas in this country that have seen material, material like house price appreciation over the last five years. You know, the Washington D.C. metro area that I call home has not been scathed by that at all.

You are, you're seeing these, these changes happen now if some of the scuttlebutt out there about the, about the GSEs, you know, comes to fruition and even if they just stop raising the conforming limit, I know Mr.

Pulte came out and said that he's not lowering it, but if they don't, if they just don't raise it and you see home prices appreciate more across the country, you'll see a larger percentage of those loans that maybe would have been conforming or high balance move to the jumbo category.

And that's one of the things that folks in the capital market space are, are super dialed into right now because there's not a deep liquid market for these non agency products out there. And it's something that is really front of mind for all those capital market practitioners is do I hedge this? How do I hedge it? Do I trade it?

Am I creating my own securities? Am I going back to like the old like pre crisis days where there was a bunch of different lenders who are creating their own securitization shelves?

There's just a lot of really interesting things out there when it comes to just all things home price right now and the downstream effects of it.

Olivia DeLancey: 00:13:22

I have to say that Mike Brennan, it's lovely to have you both here. Because my job gets so easy when you two just talk about data back and forth. I'm just sitting back on mute letting you guys do your thing.

It's, it's wonderful. So thank you both for going through all of that. Lots of good color there.

Mike Vough: 00:13:39

Mike.

Olivia DeLancey: 00:13:40

What else have you been up to lately?

Mike Vough: 00:13:42

I mean there's a lot going on at Optimal Blue. We, you know just, we're coming off the tails of our, of our user conference which was fantastic and there's a lot of change here.

Primarily folks might know me from my hedging and trading background but about six months ago I took a different role running corporate strategy across the company which includes the data sides.

I've been working really close with Brennan, been working with Chazz who runs our partnership network and also trying to plot this three to five year vision for Optimal Blue. And it includes a couple different things just like partnering with folks like the MBA. I actually just recently was a part of their MBA now video.

So took the Metro down to D.C. and chatted with the folks there about some of the things that we're seeing in the marketplace right now. You know I mentioned some of them.

You know Brandon called out the rise in non qm. That's something that we're not only seeing from the agency side like the kind of the tailwinds from that from a policy perspective.

But I was recently in Las Vegas for the Structured Finance Conference and the amount of investor demand that I saw for that type of product there was really eye opening.

What I've been doing now is basically just making, making a bunch of phone calls and meet with folks to figure out like what we could do to kind of bring some of that depth of the secondary market from the agency product to these non agency products as well. Especially if we expect that percentage to, to grow and shift.

And whenever you have that deep secondary market it helps give more pricing power to the lenders to give better rates to our borrowers through think is really important here at ob.

Brennan O'Connell: 00:15:14

I'm curious just in you know, I know you were just out in the Structured Finance association conference out in Vegas and having some of this dialogue about kind of these, these tool two pools of liquidity, right.

So you have your kind of like traditional agency MBS buyers and then we've got this other area, this non agency group of loans that are requiring liquidity traditionally the jumbo loans in many cases they're sitting on depositories, balance sheets kind of dispersed throughout the country.

But then there's this kind of like growing expanded guidelines loans that are you know, like don't fit like kind of like the traditional like prime jumbo bucket and are really kind of like a new asset class in some regards.

And to your point there important to figure out how to like make sure that there is like liquidity for those products and and ultimately for like the borrowers who are pursuing those products, have you found like, like where is that liquidity coming from? Is is the first question. And then like is that liquidity? Are those investors? What's the overlap with the agency investors? Right?

Is it, is it like the same folks who are buying REM BS are also now adding not agency, maybe as like part 2B to that question.

Is it typically like whole loans that folks are getting investments in or making investments or what's like the state of private label securitization?

Mike Vough: 00:16:46

It's a really good question.

So first the way I'll address that is, you know, non qm, I think it kind of is, it deals with a little bit of a negative connotation just because it has the word non in it. And it really comes down to just different levels of income verification.

If it was called to your point, like we have labeled as expanded guidelines here at ob, if that was like the industry vernacular, I think some of the hesitancy around the asset like might go away because sometimes the credit profiles on this stuff is just as good as agency type paper, but it just doesn't follow the same income verification like structure that's there for agency paper. So that's one point I wanted to get off my chest from the investor side of the house.

So right now agency paper, Fannie and Freddie have approximately like a 40% market share that we see on our data from buying agency loans. You take them out and that's a big part of the market gone from a buyer perspective.

And then a lot of the folks who are buying loans are actually also then selling mortgage backed securities or whole loans. Fanny or Freddy as well.

So if you're an aggregator, you're most certainly looking at selling things to the cash window after you've already acquired it from maybe like Correspondent or tpo. So they're, they're a big part of the market and they're not participating in this non agency space.

And I'll say this, but a very, I'll be very funny here yet. Like that might change like if they go, if they are released from conservatorship. But right now they're not buying those types of loans.

So that's something that to note. Now the buyers that you see in this space are a little bit different.

There are the traditional aggregators, there's also different aggregators who focus primarily in the non QM space. I would think about people like a, like a deep Haven or an A D or folks like that, maybe the Angel Oak who are Aggregating. Right.

So they're buying whole loans from individual lenders today, potentially bulking them and then selling them to, you know, maybe insurance funds or REITs or hedge funds in you know, larger size, 50 to 100 million. And there's also folks who've been out there creating their own, their own private label securitizations.

So in the news you've seen folks like rate or cross country who have actually put out securities recently. And the only way these securities differ from your traditional agency mortgage backed security, which those, those lenders put out today in droves.

Right. It's part of, you know, daily or weekly processes on their end. On the non agency side, it just takes longer. Right.

You need to get to volume of consequence. So somewhere in that 250 plus range of volume usually. And that security doesn't have an agency guarantee.

So in a lot of ways those lenders are basically saying, hey, my margin is the G fee that I thought I would have made on these loans. And they're creating again, not a, a multi issuer pool or a custom spec pool that's guaranteed, but a pool is basically guaranteed by the lender.

Right. Like they're going to be graded on that credit risk. That happens once people start looking at the performance of the bonds.

And they're structured in the same way that you see bonds structured in the, in the big short era. Right. If you got your aaa, your double A and there's been bonds structured like that forever. Right.

It's not specific to that era, but a lot of folks know it from, from that movie or that book of that, that tranche structure. And that's typically how you see people do that today. The lenders creating those are kind of few and far between.

You're kind of thinking of that top five, the top ten range of lenders. Now if the percentage gets larger of originations in that size, maybe you see that expand to the top tier.

Maybe that's the top 20, top 30 who are doing that. But right now it's definitely limited to the largest players. And you know, the vast majority of lenders are locking these loans. Best efforts.

Our PPE today for example.

Brennan O'Connell: 00:20:31

Yeah, that's, that's good context and I'm, I'm sure as you pointed out, there will be changing dynamics. The, the agencies aren't participating yet. It's, it's non agency for now, right?

Mike Vough: 00:20:42

Yeah, it's, we're in such a fluid time.

You know, I think, yeah, a lot of folks are waiting on every little news bulletin that comes out Especially from the agencies these days, a lot of folks are wringing their hands about will they limit, will they lower the conforming limit, right? And then Mr. Pulse came out and said no, but everybody's just waiting. We're just waiting to see what happens.

Brennan O'Connell: 00:21:01

I know we want to hit on this at some point. I'm probably jumping a topic or two, but you know, in this non agency space it seems like the mechanics of pricing are a bit different.

And how the supply chain of pricing going from TBAs to maybe an aggregator, a Fannie Freddie Rachi to an originator, down to a borrower, that that's what we're used to in the agency space. And like the, the Fannie Freddie rate sheets are in so many ways sort of like the de facto like pricing mechanism. Not, not the case.

You don't, you don't have that Fannie Freddie rate sheet in the non agency space.

So like how are folks coming up with pricing for a DSCR loan, a bank statement loan, like these programs that are, you know, fundamentally the execution isn't going to the agencies. Like how are folks figuring out how to value those?

Is, is it more closely tied to like what that insurance company or what that REIT would, would pay right now for that whole loan? What's kind of like the mechanism?

Mike Vough: 00:22:06

I mean, you're spot on. I mean like the current world of like agency pricing is almost like a Russian nesting doll that gets all the way back to agency pricing at all times.

Right? Like so, you know, you think about folks who are securitizing, well, it's TBA plus adjustments, right? And that's the top 20 to 30 lenders.

And then Fannie Mae and Freddie Mac are pricing like that, right? It's TBA plus a servicing strip.

Maybe some buy a buy down and in a lot of cases people's cash pricing is just, you know, TVA pricing plus a buy, a buy down at the note rate level. And so you have all these folks that are putting out the different pricing models, but it's all based upon TBA at some level.

So when we're talking to people about hedging, it's a pretty easy proposition, right? You say, oh, the pricing is all based on TBA plus spreads at different points. Then you hedge with TBAs, right?

It's, you get really awesome hedge effectiveness. We talk to any of our hedging clients that they do a great job using that type of security to hedge.

The problem in the non agency world is there's no backstop like that, there's no common denominator that folks can ground themselves to.

So, so you do see it as a little bit more of the wild wild west in a lot of ways where you'll see some very sophisticated models to not so sophisticated models.

Depending upon what's out there, it could be a blend of other aggregator non QM agency pricing, which is almost more like the traditional best efforts world and the agency world.

But then you see the very sophisticated people who are using cash flow based models with prepayment models and credit models and HPI models and also folks who layer in the recent securitization deals on top of that.

You know, one of the areas that I think still hasn't really been solved is how do you say, hey, you know, Joe Smith, the borrower has a 700 fico score.

What is that 700 fico score then translate to in how much of that loan is triple A, double A, single A to line up with the actual secondary market stuff? Like I think that connection really needs to be solved before we get the same type of deep liquid pricing that we see today on the agency world.

Olivia DeLancey: 00:24:20

Mike, this feels like it could be a good segue into a recent opinion piece that you had published in Newslink, which is the newsletter from the Mortgage Bankers Association. You kind of talked through pricing approaches and how they're handled today and what the future should potentially look like in your opinion.

You want to tell us about that?

Mike Vough: 00:24:42

I'd love to.

You know, one of the things I think is really interesting is, you know, folks will sometimes make comments about how pricing is created and they could start with loan officers who are, who are like I don't like my pricing to folks who think they're giving away their IP in a ppe. And it really comes back to the fact that folks created technology to solve the issue at the time.

And the issue at the time when, you know, the first PPE start coming around was we had a rate sheet. And the rate sheet was the only way to communicate in mass to folks about their mortgage pricing.

And it had to be grid like it had to be product based. It had to be a way that someone could just look at it and say, oh, it's this plus that equals that and that's what I can go quote the borrower.

And that like almost limited us in terms of what we could do from a creativity and a complexity world and how we price mortgages today. Right. If we're always going to be off the agency, kind of like TBA or cash pricing as our, as our guardrail.

Plus there are LPAs that are grid based plus servicing grids that are grid grid based. You know, it takes away the ability to get super fine tuned. And there are parts of the industry that do this really well today.

You think of, I'll give a shout to our MSR model where you get a bespoke valuation out of that based upon that individual's characteristics, right? So it's not grid value 1 plus grid value 2 plus grid value 3 equals to price. It's a bespoke valuation to that specific loan being value.

And I, I think we'll see some of that change in, in the PPE space in the future. Like for example, we see this in the secondary markets today. People have APIs that they use to price at a very, very, very granular level.

And, and usually you kind of see things start in a secondary market and then move to the primary.

Usually every new spec pay up starts with somebody paying up for something in the secondary market and then it like moves to the origination side of the house.

So I think we'll see a big change where you know, maybe an entrepreneurial investor or two is like I'm done with limiting myself to grid based pricing in a rate sheet and they move to something that's more dynamic and more automated. You know, think about like your, you know, when you get your airline tickets price today.

I don't know if my FICO score impacts the ticket that I get from mix on Expedia like that. That's not a thing at all.

You get a demand based price and hey, maybe that's part of the algorithm that they use but the consumers doesn't know anything different about it. They just go to one of the best prices. And I think that you'll see that change eventually in the mortgage industry.

I know we're commonly behind other industries, but I think a lot of the train tracks are set up for something like that.

Olivia DeLancey: 00:27:30

And I think kind of the recommendation you gave to lenders in your piece was hey, you just have to embrace the incremental innovations that are happening today because they are happening and they're going to keep happening. So don't keep kicking the can down the road until you, you know, have more time or what have you. You're never necessarily going to have more time.

Start now.

Mike Vough: 00:27:55

I couldn't have said better myself. There's technology out there that helps with this.

We have a rate sheet tool that is an improvement upon just the, oh, let me just average different rate sheets together and put out my pricing. I mentioned our MSR engine that gives out, you know, loan level, MSRs specific to each borrower and even depending upon how you execute the loan.

So, like a big thing out there now. And I was so shocked when I saw this number. About 91% of folks having taxes and insurance in their mortgage.

For whatever reason, I thought that was much lower. But, like, that's what our data is telling us.

And if you think about the different remittance cycles of different securitizations and outlets, you need to include the different float components not only for tax and insurance, but also principal interest. And you almost need a servicing Right. Per every loan, per every execution. Right.

Freddie and Fannie have different remittance periods that lead to different float days. Every state has different tax remittance schedules and then also different foreclosure and delinquency laws as well.

You need to be able to model this at the loan level, but Then also like 4, 5, 6 different versions of the loan depending on where you think the best X is.

So there's a lot, there's a lot there in terms of being able to drill down and there are tools there, and you have to adopt these incrementally so that when, like the big, you know, kind of like deep seek moment happens, you're not starting from square one. You're start. You're starting at, hey, I'm only one step behind. And so that's my advice to lenders.

Olivia DeLancey: 00:29:23

You know, speaking of tech innovations and adopting incremental changes, we're certainly not here aiming to talk about technology today necessarily, but there are some really interesting things that you and Brennan are doing with our data when it comes to our tech systems too. So in AI, you mentioned deep seq is a huge part of that too, if you wanted to touch on any of that.

Mike Vough: 00:29:46

Yeah, I mean, there's a bunch of things that we're doing over here on the data side. And honestly, our kind of like, guiding light here is how do we give lenders, like, the avenues to be more profitable?

So whether that is more time in their day to make decisions to sit back and be strategic, or it's actually giving them tools that increase profitability. It's such a huge focus of ours over here.

And kind of the biggest thing that we've released recently is askobe, and it's a chat interface that works with your data right now.

And we're really excited for that because even before getting on our call today, I sent in a couple questions to make sure I knew the right data stats. And it was like that. It was like it was better than emailing somebody and being like, hey, look at the data.

And you know, the whole idea is like, how do we get this data to the fingertips of decision makers?

And what they're, what people were doing pre this is they were probably yelling down the cubicle line to an analyst or they were sending somebody an email and saying, hey, can you pull this for me? But now I could be on this call with you guys and I could be typing away and I can get the data and actually sound really smart.

Even though I'm just pulling, I'm just using the latest technology and I think there's a lot there where, where we started with the origination data.

But we're really excited about adding our capital markets and hedging data to that so that I could tell a really compelling story of that feedback loop. One of the things I can't stop saying, and I'm prob.

I probably annoyed a two of you with this, is that like feedback loop between the primary and secondary markets. When you go out and you start selling loans and you're getting different execution from investors that naturally feeds into the primary market.

Brennan O'Connell: 00:31:27

Right.

Mike Vough: 00:31:27

If you know you're getting 10 bips extra from some investor for a specific geo and loan product type, well, what are you going to do? You're going to add that to your front end pricing so you could actually originate more loans. Right. Higher price, lower rate.

And that's that feedback loop that we want to make much tighter in the industry.

Olivia DeLancey: 00:31:46

Well. And something that Optimal Blue is uniquely positioned to do for the industry. Right.

Because we not only have about one in every three loans locked through our PPE on the primary side, but also kind of state of the art technology on the hedging and trading side as well.

Mike Vough: 00:32:03

Yeah, I mean we're approximately 40% in both the primary and secondary market. So it's a really rich data set that we could use to help our lenders be more, be more profitable and then be more strategic too.

I think one of the things that we're trying to do here is again, not just give you basis points by advanced analytics, but we want to give you time back into your day so that you could actually sit back and be strategic if those things kind of go by the wayside as you're blocking and tackling all day.

Brennan O'Connell: 00:32:31

Of course I'm biased on the data side, but this introduction to the market of real time or near real time feedback on production and borrower behavior and where loans are getting locked, you couldn't have the types of dynamic Pricing models that we're kind of suggesting here 10 years ago because this data didn't exist. Right.

Like the data itself and the ability to capture, standardize and then deliver large data that is broadly representative of the market as a whole. That's a new thing to this whole industry and it's really exciting.

We're certainly in an advantageous position because of where we sit in the software tech stack and the market share that we have on both the pricing and the hedging side that we can kind of put these data sets together. But it's really exciting. And the data fundamentally is the building blocks. Like we're talking about AI here.

But so much of the story around AI, I mean you hear this all the time. It's like, well, what was the training data set? I mean you need to build out the model to have the intelligence, to have the predictive analytics.

You have to have the data that's kind of like step one.

And so I think it's, as you both have alluded to, it's really just been kind of exciting to start to deliver that and to see what our originators are doing with it.

Mike Vough: 00:33:53

Right.

Brennan O'Connell: 00:33:53

Like we definitely have originators who are doing things now with the data that even a two or three years ago we thought like, wow, that that would be. Can only imagine if people were to start building out price elasticity models like that.

And now they're doing it and I'm quite certain they're more profitable for it.

Mike Vough: 00:34:12

Yeah, I think, you know, there's, there's so much to be done here still.

You think of even just a simplified example of, hey, you notice a certain trend in the secondary markets and then being able to apply that to the primary market with a click of a button, you know, this specific coupon that is not, is becoming less, like less liquid. Well, you know, you're going to have higher hedge cost.

Can you attribute that to your front end pricing so that you're, you remain, you know, the certain level of profitability that you want to achieve and that's just becoming that right now is folks managing an Excel. It's folks, you know, taking days, if not weeks to adjust things.

And now we get to the point where maybe it's the click of a button, maybe it's a prompt on the system that is very, very exciting in a world that we're trying to lead folks to here.

Brennan O'Connell: 00:34:59

So we've alluded to it a few times here, both, both AI enhancements and then saving folks time.

Mike, I think you're probably guilty of Running like a skunk works here at OB A one man skunk works to get some of the, the AI assistance that we have on the hedging side to prototype. Do you want to talk a little bit more about those, how they can be used in particular to save, to save time. As we've mentioned here a few times.

Mike Vough: 00:35:28

I'll give a little bit of a history lesson first.

So when I first I got my hedging and trading start Compass analytics and one of the things that I was doing there as an up and comer was I was partnered with a more senior worker there who was, who was chef, who was basically giving me guidance, right? He was teaching me like the ways of trading and you know, giving me a lot of feedback was an invaluable resource in my career.

And one of the things he had do as I was getting started was I had to do a write up form every morning on a specific lender's position change and then profitability change. And I had to have to have it too before the bond market opened.

So the bond market opens at 8am I'd have to have a detailed little list of all these little things that either made them shorter or longer from a risk perspective, but then also made and lost them money from a profitability perspective.

And he's kind of guiding light here was like you got to be able to answer your clients like when they call in the morning, so you have to be prepared. And that always kind of stuck with me. And there were folks who were more junior than me that came on.

I kind of used that example to try and like train them as well.

But one of the things that I kind of was a light bulb moment for me when some of these LMS start coming out was could I take those lessons that I've learned and automate that process?

Could there be a, you know, an automated blurb that could be sent out 7am, 6am, 5am, whatever time you wanted that would give you that level of detail. And so definitely guilty as charged. I'm working on that.

But I needed to get my hands dirty in the AI stuff and so I spent a fair amount of time trying to work with the data. We have a fantastic partnership with the folks at Microsoft and they actually gave me a lot of guidance as well on this.

And I worked with Siever and his great team to get this productized.

But it is a blurb that comes out that tells you every morning the top five drivers of why your P and L changed, why your position changed, and then why your Month to date profitability change in the mortgage world. Today we're still captive to monthly accounting. Right.

And you may not really care about the daily swings, but you most certainly care about the monthly swings. And so we're capturing it at all those levels and you know, we embedded it in our product Compass Edge.

But we also have now released a summarized email that has all three blurbs in it that could be sent to your cfo, your head of accounting, your CEO, any executive. And it's almost like you have that analyst. I think one of the things that we keep hearing from people is they have to do more with less.

Using this hedging platform, with these embedded AI tools we put in there, you could do so much more with less. Right. That was basically what the analyst job was.

The analyst job was, hey, go look at the data and figure this out because Mike's in meetings all day. Well now the software just does it for you.

It, I get them, I get some from my, from clients occasionally and you know, they're coming out 6, 7am and it's a detailed blurb that's explaining 100 of the position move and it's the top five drivers that's, you know, explaining 75, 85 of your daily swings. You know, these manager folks, they don't need, you know, a complete tie out.

They need to know the big things changing because what that allows them to do is spend more time on strategy. Right?

You if you hear that overnight some investors changing their pricing, that's one of the common things we see, hey, investor XYZ move their pricing a little bit different than the TBA market. Well, you need to know that because you have to put out a rate sheet tomorrow morning or you're going to do a loan sale tomorrow morning.

You need to know what the market is saying about your loan population and you need to know it like right now. And so we're, we're really, really excited about this. I think there's oodles of way that we can kind of continue to build upon that.

You and I have had some really interesting conversations about how we could do this for the origination data as well to kind of build upon that. I think that's a definitely the next step that we'll see here.

But just really, really, really excited about helping our clients do more with less because that's the industry we're in right now. I mentioned those profitability stats earlier.

People are still going to be doing more with less for a little bit of time here and I really think we hit the nail with a hammer here on this one.

Olivia DeLancey: 00:39:50

That feels like the perfect segue into what we call our bonus question, Mike. We ask every guest this at the end.

So Mike has already plugged our mission a few times here at optimal blue, which I will point out, I did not ask him to do. Which is a great testament to the fact that we really do live by our mission here.

So we aim to help lenders maximize profitability on every loan transaction. So with that in mind, Mike, the bonus question.

What is one thing that in your opinion a lender should be doing in today's market to maximize their profitability?

Mike Vough: 00:40:27

Yeah, I have a couple. Can I do a top, Can I do like a list? I have a couple things I'd like to throw out there.

Olivia DeLancey: 00:40:34

We will make an exception for you since you are one of our own. Yes.

Mike Vough: 00:40:39

One, use the OBMMI mortgage rate feature. You can't have an MSR portfolio. You can't hedge long term locks without. There's no other hedge out there like this in our relationship with the cme.

You can cross margin different securities and you know exactly the data that's going into this index. And it's, you know, it's not using apr, it's not using any of these other things that you see out there.

It's using actual lockdown data, which is an indication of actual, you know, prepayment potential, in my opinion. So that's, that's got to be number one. Number two, you need to create your own proprietary. You cannot be at the beck and call of a single investor.

If you're using your pricing, you need to have a blend of all of your potential outlets in your front end pricing.

So that would be number two, number three, and I'll, I'll cap it at three so I don't get yanked outstage is you need to move away from grid based pricing in your servicing valuations. You know, the servicing valuation is such a huge part of the profitability of lenders and you need to be more dynamic than just X plus Y equals Z.

It needs to be a cash flow based model that also accounts for the different things that we see out there, such as, you know, different delinquency percentages that change over time. I, I handled a float point earlier, but a high rate environment, that flip differential could easily be 5 to 10 basis points in either direction.

So that would be my top three things that lenders should do today to be comfortable.

Olivia DeLancey: 00:42:09

That's excellent. Thanks Mike. And for our listeners, Mike shares a lot of content. So Mike, if it's okay with you.

We'll include a link to your LinkedIn page in our show notes and folks can reach out to you if they want to hear more about anything that you shared today. Thank you so much, everybody. And thank you, Mike, for joining us. You can catch us again next month in our next episode of Market Advantage. Take care.

Mike Vough: 00:42:34

Thanks, everybody.