2024 Mid-Year Commentary Outlook

First Half 2024 Grander Update:

The first half of 2024 has been dominated by Fed speculation – when will they drop rates? How quickly will they do so? – but the real story in mortgage markets was the ongoing lack of supply and continued resilience of mortgage rates. For MSR investors, the news has been terrific – unless you’re trying to source more product at cheap valuations. For fixed income markets as a whole, however, this steady picture and the range-bound market associated with it is starting to show signs of change.

Fixed Income Markets
Long term rates have traded in a 75-bps range since the beginning of the year, after starting the year just south of 4%, rates peaked in late April around 4.60% and have traded down to the current 4.25% range. The trading range has been unconvincing; small perceptions of future risks (the potential for a Republican sweep of the White House, Senate and House, for example) has been enough to create outsized moves. Supply – demonstrated by repeat “biggest ever” note and bond auctions by Treasury – remains robust, with rate pressure further strengthened by Fed portfolio shrinkage and the beginning of the baby boomer retirement drawdown trade. The bias remains towards higher long-term rates, in other words, although it will likely require more news to convincingly break out one way or another.
At the shorter end of the curve, two-year rates remain locked in a 4.25-4.50% range, as Fed speak almost immediately counteracts any suggestion of sooner or faster rate reduction. Chair Powell and the other governors have been remarkably consistent in their verbiage, and similarly all on message that rates will only be lowered with clear evidence of reduced inflation within their range – and as long as headline CPI and core have a 3% handle, that evidence is lacking. Moreover, until consumer confidence worsens, or unemployment rears its head, the Fed has no real push to drop rates.
Spread product has been largely range-bound, although markets are starting to differentiate between what are seen as “low risk” spread product – investment grade credit, conforming and guaranteed mortgage paper – and “higher risk” product such as CMBS and non-dollar bonds. Supply is modest YTD, but large corporate issuance in 2019-2021, driven by low rates and cash hoarding in the pandemic, should result in significant rollover activity and pre-positioning in the second half of the year.
Mortgage and MSR Environment
For mortgages, that picture – a locked front end, effectively no steepness to the curve, and a trend towards overall selling in the market – has kept new issuance coupons locked at 6.0%, off of new origination pools – small as they are – in the low 7% range. That has kept effectively all refinance incentive out of the market, and numbers suggest it’s also limited new purchase volumes effectively to first-time home buyers and “forced” sellers (due to moves, family events, etc.). New home construction remains at sectoral lows, and existing home sales fully describe the low single digit voluntary CPRs seen in vintage pools.
What does this mean? For existing MSR owners of vintage pools, the result has been slower prepayments, higher valuations, and lower than expected involuntary prepayments. For originators, it means a low amount of activity – with companies chasing any MSR paper which may offer an opportunity to refinance or market second liens to borrowers, but a gradual slowing of activity in very deep in-the-money MSR pool trading. That need for originator activity, though, has resulted in tighter spreads, helpful to investor valuations even though supply constraints are making it challenging to find product.
Importantly for modelling, we’re now entering the third full year of mortgage origination rates being 3% or more higher than the bulk of outstanding conforming mortgage paper, allowing us to gain more and more confidence in our prepayment behavior model and how deep in-the-money borrowers behave “in real life”. With most homes in the money from an HPI perspective, there is little incentive to move except when absolutely necessary, and yet we have not seen the uptick in second lien volumes which might reflect an exhaustion process with homeowners in an existing, aging home. While we will look with concern to any erosion in the broad economy, with unemployment at lows normally associated with higher inflation, we do not see significant weakening in borrower strength in the near future – which should continue to lock in low CPRs for yet another annual cycle.
Performance for Grander’s pools continues to beat the expectations made at time of purchase for prepayments – both voluntary and involuntary – and our predictive model for geographic relative performance is also doing well. GMOF 1 lifetime performance continues to play out in a range that will lead to life-of-fund returns in the low 20% range, while more recent pools indicate expected lifetime performance in the high teens.
Outlook
With July 4th behind us in a presidential election year, all focus will now be on November and the election. We aren’t political prognosticators here at Grander, but the markets are viewing signs of a Republican sweep with some worry: one political party holding the House, the Senate, and the Oval Office tends to lead towards higher deficits and more extreme macroeconomic policies. In an environment where the Fed is still worried about overheating in the economy, that would tend to suggest higher rates on the long end, wider spreads, and more volatility. For MSR holders, that should be to the good – cash flows should remain robust, and both voluntary and involuntary prepayments should remain muted – but the uncertainty can affect trading and valuation spreads. We’ll have more to say once we get past Election Day.
About Grander
Grander was formed in 2017 as Grander Investment Management LLC and Grander Mortgage Capital LLC. Robert Williams, and Curtis Whitaker are named as co-founders. Combined they bring 60+ years of Banking and Capital Markets relationships forged over multiple economic and market cycles. Established as a Master Servicer in all but four states, Grander has secured State and Federal license approval as an “approved” seller servicer for Fannie Mae and Freddie Mac loans. Consideration to obtain GNMA approval in the future. Grander has partnered with strategic organizations on Subservicing and Recapture programs seeking to build long-term relationships and ensuring that recapture economics and incentives align across all parties.
Our “Value Proposition”
Grander’s mission is to foster life-long client relationships based on a foundation of trust and client satisfaction. Our value is supported by our seasoned investment professionals who have successfully managed investment portfolios throughout their career, bringing a unique perspective with diverse backgrounds, experience, and knowledge of financial markets. We strive for opportunity to access value creation outside the public markets within the Mortgage Service Rights space. Grander continues to develop future-oriented investment solutions to invest the assets of our clients in a risk-controlled and performance focused manner.

Please contact your Grander representative should you have questions or if you would like any additional information. Our investor relations Team can be reached at (424)-278-9060.

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