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#TradeTalks: Optimal Blue Talks Current Pandemic and Impact on Mortgage Rates

Jill Malandrino, Global Markets Reporter at Nasdaq, recently sat down with Brennan O'Connell, Data Solutions Manager at Optimal Blue, the largest digital mortgage marketplace to discuss the current pandemic and impact on mortgage rates.

Jill Malandrino, Global Markets Reporter at Nasdaq, recently sat down with Brennan O'Connell, Data Solutions Manager at Optimal Blue, the largest digital mortgage marketplace to discuss the current pandemic and impact on mortgage rates.

Below is a transcript of the conversation, which has been lightly edited for clarity.

JM: Can you describe your footprint within the financial services industry?

BO: Optimal Blue is the largest mortgage marketplace in the country, facilitating pricing for roughly one-third of all mortgage volumes in the United States.

In this industry, you have the loan originators on one side, which in the mortgage industry is known as the primary market. Then the loan investors or aggregators on the other, known as the secondary market. We are positioned in the middle and help those two groups interact and take loans from origination in the primary markets through to the secondary market, where they’re ultimately packaged and sold as mortgage-backed securities.

JM: Tell us more about the recent partnership with Nasdaq and your family of mortgage indexes?

BO: Given the volume that we have coming through the system, last year we launched the Optimal Blue Mortgage Market Indices (OBMMI). The family is comprised of 16 mortgage rate indices that are based on the national average of locked rates for the most popular products that borrowers can get for a loan. For example, our FHA rate index represents the national average of one-third of newly originated FHA loans. We produce that mortgage rate each morning for the loans that went through our system the previous day.

Working with Nasdaq provided the opportunity to disseminate these rate indices through the Global Index Data Service (GIDS), reaching a much wider audience. Now, sell-side firms, buy-side firms and financial web portals have greater access to this set of indices.

JM: What sets this family apart from other indices available in the market?

BO: There are a few things that make the OBMMI unique.

The first is the type of data that is used to generate the indices. We call it Transacted versus Survey Rates.

Survey Rates are the advertised mortgage rates of lenders, which by design, are based on the best offer the lender is able to provide. A Transacted Rate, which is what Optimal Blue generates, is based on loans that are actually locked between borrowers and lenders. We are able to see what is happening versus what does the survey response look like. 

The data is also generated daily, so in times of market turmoil, which we’re obviously experiencing much of this year, it’s really important to see updates on a daily basis. Optimal Blue produces its rates daily.

The final piece is the granularity of the data. This is really unique in that, due to the data set, we’re able to show the impacts of loan-level pricing adjustments. For those that aren’t familiar, loan-level pricing adjustments are risk-based adjustments that are driven by individual loan traits. 

For example, a three-and-a-quarter (3.25%) loan may be available for a borrower with a FICO Score of 780, but a borrower that came in with a 650 FICO Score might only see a 3.50 as the offer. Our rates show how those loan-level pricing adjustments affect different loan rates and in different borrower segments, which sets us apart in the market.

JM: That really is interesting. And let’s go back to what you were saying before the impact of COVID-19 on the markets in general, how has that affected the mortgage industry specifically?

BO: The primary effect, and, I think this is where a lot of the news is, is that rates are down as the Fed has pumped volumes of cash into the system via mortgage-backed securities purchases and keeping rates down in general. So, rates are down, which is great for consumers and has led to a tremendous refinance boom.

But there are other interesting dynamics that are maybe covered a little bit less, like the primary-secondary spread. I talked earlier about how Optimal Blue connects both the primary market and secondary market. If you look at what the primary-secondary spread is, it’s the delta between the prevailing yield on mortgage-backed securities and what the prevailing mortgage rate is. And that rate has actually gone up by about 50 basis points over its traditional number. So, although rates are extraordinarily low, there’s probably some room for rates to fall even a bit lower, if they’re able to stay at a lower rate in the secondary market. And a number of reasons are driving that.

Volumes are up, so lenders have constrained capacity, and because of that, they are keeping rates a little bit higher than they might otherwise, in an effort to control that volume. Then there are concerns around forbearance, and because of that uncertainty, there’s extra margin being built in between the primary and the secondary market.

Another interesting dynamic is the credit tightening that’s going on, which relates back to the forbearance, and to some extent, general uncertainty. If you look at all products – FHA, conforming, VA loans - the last three to four months have seen a pretty steady and slow uptick in credit scores, or the average credit scores, for borrowers who are getting loans. Although rates are extraordinarily low, the loans are really being generated by folks that are on the higher end of the credit spectrum.

To learn more about Optimal Blue, visit www.OptimalBlue.com.

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