Besides being enthralled with Tiger King and My Octopus Teacher four years ago, what do AL, CA, CO, CT, FL, GA, MD, MA, NJ, NY, NM, NC, RI, SC, TN, VT, and VA have in common? First-cousin marriage remains completely legal in these 17 states. Demographics are of great interest to lenders and originators. As of 2024, there were 65 million Baby Boomers, accounting for 20 percent of the U.S. population and 36 percent of total homeowner households, and about 83 million Millennials (born between 1982 and 2000). Total household net worth has increased by approximately $44 trillion, or $332,000 per household since the pandemic (Q4 2019 to Q2 2024). Of that, Boomer overall wealth increased by $19 trillion, or $486,000 per household, half of which is due to house price appreciation. Don’t think for a second that these demographics and statistics have escaped the notice of every reverse mortgage company out there. (Today’s podcast can be found here and this week’s is sponsored by The BIG Point of Sale, which offers a highly configurable, easy to install point of sale solution. Its simplified consumer workflows and web-based portals allow for consumers and loan originators to collaborate with the back-office team to keep everyone informed throughout the loan process. Hear an interview with Rate’s Connie Lindsay on what the SVP of Lending role at a mortgage company entails and how customer experience continues to be an arms race in the mortgage industry.)

Software, Products, and Services for Lenders

An open letter from Polly Founder and CEO, Adam Carmel: "As we near the end of another incredible year, I am reflecting on Polly's mission, our vision, and what we have been able to achieve in collaboration with our customer partners. When Polly was founded in 2019, it was clear then (and even more so now) that legacy pricing technology was doing the mortgage industry a disservice. The average cost to originate a loan has increased over 500% in the last 20+ years, and yet, the mortgage industry was burdened by the same antiquated capital markets software. I thought to myself…": Read more!

Compliance for Mortgage Companies: A Guide to Avoiding Common Violations. Compliance is a serious priority for mortgage companies, and understanding the common pitfalls is essential to managing risk. Ncontracts’ latest guide covers the most common compliance violations found in the mortgage industry (including examples of mortgage lenders that got in trouble with regulators) and offers actionable tips to help streamline compliance management, minimize risks, and keep your operations on track. This guide covers why mortgage companies struggle with compliance, the laws & regulations that trip up mortgage companies, and how to simplify compliance and reduce regulatory risk. Download the full guide for more.

Down Payment Resource continues to spread holiday cheer by unwrapping FHA’s Annual Report to Congress that shows 16.90% of FHA purchase mortgage endorsements in FY 2024 used down payment assistance (from a government source as opposed to a gift). If you’re not hearing the angels sing (yet), consider that in 2023 only 14.98% of borrowers with FHA mortgages used DPA, and in 2022 that was 13.65%. “While this tells a promising story, we recognize there’s still a lot of work to do to close the gap between how many FHA borrowers are using DPA and how many more could have used DPA to qualify. Our resolution for 2025 is to continue to put DPA in the spotlight and spread the word on how DPA helps lenders lower decline rates and boost CRA lending,” notes DPR’s founder and CEO Rob Chrane. Cheers for that! Schedule a demo today to learn more.

Thought Leadership: How Pricing a Pipeline Has Changed

Over the winter break, Marcus Lam and his family visited London, enjoying Christmas markets, the Warner Brothers Harry Potter studio tour, shopping, and plenty of great food. Though he's ready to take a break from English breakfasts, meat pies, and fish and chips for a while, he was kind enough to pen an article for the new Chrisman Commentary website. “While shopping, I noticed some stores listed prices in both GBP and USD, which piqued my interest given my background in capital markets. I thought about how companies like Zara must manage currency risk through hedging, dynamic pricing, and regular adjustments, especially as they operate in multiple currencies. This made me think about the mortgage industry, where, unlike Zara, we only deal with one currency but still face challenges around market movement, data accuracy, and timing. Reflecting on my early days in mortgages, when we used paper rate sheets and fax machines, I’m thankful for the tech advances that now help us price and hedge more efficiently, especially during volatile market periods. Read on.”

Lock Extension Costs Explained

When a borrower locks a rate with a lender, the lender promises to hold that rate for the borrower until the loan closes. But there is a deadline and moving that deadline back costs money. Depending on what the mortgage rates are doing, this sometimes makes perfect sense to everyone, but other times, it seems counter intuitive. This is the story behind the ‘extension fee.’

The Risk of the Borrower Lock. When a lender takes a rate lock, it takes on risk. The lender grants a lock today on a promise by the borrower to close a loan in the future, say 30 days later. Between today and the day the loan closes, the market is likely to fluctuate at least a little, and sometimes quite a lot. This leaves uncertainty about whether the lender made a good deal. Here’s a quick example:

On January 1, Mr. Borrower locks a rate of 7%, for which investors in mortgages are willing to pay 100.00*, or par, on that day. This means that the investor will pay dollar for dollar for the mortgage: The investor purchases a $500,000 loan for $500,000. However, on January 30 (the day of closing), mortgage investors have decided they are willing to pay 101.00 ($505,000 for the same loan). In this case, the current mortgage rates advertised are lower than they were at rate lock. The lender now has a loan that it can sell for a premium 1% higher than it thought when it granted the lock. Great for the lender, right?

At first look, it would seem that if the lender can get more money for the loan, it should be willing to grant a free extension. But if mortgage investors had instead soured on 7% rates, they might pay only 99, or $495,000, leaving the lender with a 1% loss. So, this is turning out to look like a bet and no smart lender is in the business of gambling. So, the lender must protect itself from fluctuating markets, called “interest rate risk.”

The Hedge against Interest Rate Risk: Lenders mitigate interest rate risk by hedging the locks granted to borrowers. There are a number of ways to do this, but all work toward the same end result. Consider that a rate lock is an agreement between lender and borrower: The lender promises to close a loan at a particular rate and in exchange, the borrower agrees to close the loan. When the lender makes this commitment, it takes on interest rate risk, which it offsets, or hedges, by performing an opposite transaction.

Back to Mr. Borrower’s lock . . . when the lender grants a lock of 7% to Mr. Borrower, it does so on the fact that mortgage investors are willing to pay 100 for that rate. Rather than wait until the closing date and hope that investors are still willing to pay at least that, the lender makes an immediate promise to a mortgage investor to deliver that loan, at that rate, at a future date in exchange for a commitment from the investor to pay 100, regardless of current prices when the loan closes. The lender and the mortgage investor now have a deal that is essentially tied to the borrower’s lock.

The Cost of Time: Investors make decisions on what price they are willing to pay based on risk factors, one of which is time. Given a preference, investors prefer to make decisions based on known facts, and they prefer to execute their investment immediately. When an investor promises today to make an investment at some point in the future, (at the date of closing, for example) the state of the market at that future date is unknown, and therefore a risk. The longer the time the investor agrees to wait for the investment, the more risk he takes, and the more compensation he requires.

The Extension Fee: On Mr. Borrower’s lock . . . the lender received the borrower’s commitment to close a 7% mortgage on January 30. The Lender in turn committed to deliver a 7% mortgage to an investor. If the borrower requests to close that note 15 days later**, the Lender will not be able to fulfill the commitment to the investor at the same price… The investor wants more money to compensate for the additional risk of time. This is the extension fee.

What about the Current Market? Note that the current market is not a factor in the extension fee. Remember that the lender wisely determined that gambling on mortgage rates is not prudent business and hedged the interest rate risk by making an offsetting commitment to an investor. When the loan actually closes on January 30th, the commitments from the borrower, the lender, and the investor, are all based on the market the day the lock was granted. The current market at not a factor at all.

In conclusion, the mortgage investor, and his need to be compensated for the risk of time, is the ultimate driver of the extension fee.

(* The interest rate and market prices are hypothetical only, chosen to make illustration simple. They may not represent current market prices. ** There are additional factors that contribute to the cost of time for mortgages, such as security pool dates and a lender’s ability to make that pool date. However, for the sake of simplicity, those details are left out of this discussion. The logic remains the same.)

Hope that helps.

Capital Markets

This week is expected to be relatively quiet due to the New Year's holiday, with limited market activity. U.S. Treasuries saw strong demand on Monday, driven by safe-haven buying and possibly rebalancing, as stocks continued to struggle without a clear catalyst for the broad market sell-off. The buying interest in Treasuries likely came from foreign investors, many of whom will have closed markets today and tomorrow for the holiday.

Economic data revealed that the Chicago Purchasing Manager’s Index (PMI) for December dropped, signaling a further slowdown in manufacturing activity in the region. On a more positive note, November Pending Home Sales rose by 2.2 percent month-over-month, beating expectations and suggesting strength in the housing market.

2024 closes out with more housing-related data in the form of October home price indexes from the FHFA and S&P/Case-Shiller, both due out later this morning. Other economic data of note includes the Dallas Fed services index for December, before the bond market closes at 2pm ET, per SIFMA, ahead of a full close on Wednesday for New Year’s. We begin the last day of 2024 with Agency MBS prices better by about .125 than Monday’s close, the 2-year at 4.23, and the 10-year yielding 4.51 after closing yesterday at 4.55 percent.