9.28.26 Conference Activities; Falcon Capital Advisors’ Sam Valverde on Rate Environment; Buydown Attractiveness

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include shifting calculus of the Fed, the scoop on buy down volume, in my interview with Falcon Capital Advisors, Sam Valverde, on the general importance of the bond market, an analysis of recent rate hikes, future fixed income projections, and the potential downstream risks to the housing market. Here, take a listen to a little preview. Robbie ChrismanThis is a very loaded question. At what point could fiscal concerns turn to fiscal crisis? Or put another way, what do you see out there potentially underpinning or changing the U.S. as the bedrock of the global financial system? Sam ValverdeIt's a great question. So I I think first I'd say I don't think that we're heading for a fiscal crisis anytime soon, especially if we mean a fiscal crisis you might see in other nations, right? So I don't think that we are looking realistically at anything like Argentina's fiscal crisis, right? And I worked on the Puerto Rico fiscal crisis um during the Obama administration. You know, that was that resulted in a debt moratoring. That is not, I think, foreseeable for the United States. You know, we have the most liquid bond market in the world, right? The treasury market is over $30 trillion outstanding today. It is still the bedrock security around which most of global finance is built around, um, second only to the US MBS market, which is another sort of pillar of strength for the global finance community. A fiscal challenge for us is not going to look like a debt moratorium. For us, it would look like progressively increasing rates, the inability of policymakers to shape that curve through statements and through policy action, the increasing challenge of the Fed to enact monetary policy in the face of that. That's really the challenge, right? And so for us, you know, I'd say the problems that we're talking about today are significant relative to the US market. They would be enviable problems to have in almost any other modern economy. But because we are both dealing with our own fiscal outlook for our own benefit, but also the you know the fact that all credit origination is based on the U.S. treasury market, you know, we really are managing global finance when we deal with addressing these concerns in the treasury market. Robbie ChrismanThis week's podcasts are presented by Gateless, intelligent automation that gives you the competitive edge. Gateless solutions reduce costs, deliver a superior borrower experience, and mitigate risk by automating tasks and decisions historically made by people. To learn more, visit gateless.com. I decided to play pickleball with my cousin. After a little while, he said, let's make this interesting. So we left and watched football on TV instead. We're waist deep in conferences, and every week I receive half a dozen invitations to mortgage events centered around a conference. How about coming up with something where you can see and talk to more than three people for three to four hours? Group hikes, make a bear, mini golf, bowling, croquet, pretzel making, axe throwing. Perhaps we'll see companies and state organizations shift their fundraising away from golf outings toward bocce ball or other things of the sort. Our presidents award trips on their way out. There's no doubt that we should all celebrate successes, but does anyone ask the top, fill in the blank, what they would like? There seems to be a growing opinion that maybe our top crew doesn't want to go on vacation with coworkers, so let's give them some extra vacation so they can spend it with their families. In the past, some companies, well Svargo correspondent jumps to mind, would have awards trips for their op staff. That's a fine idea. Turning to rates, despite a brief rally on Friday, the Treasury sell-off increasingly looks like a permanent shift in rates. Any buying, like we had on Friday, appears driven more by cheaper valuations than conviction that the sell-off has ended. Treasury yields surged to nearly two decade highs last week, with the 10-year above 5.20%, and the 30-year near 5.50% due to hawkish Fed communication, resilient economic data, persistent inflation expectations, weak technical support, and a lack of willing buyers. That volatility has spilled directly into mortgages where wider basis spreads, weaker specified pools, and higher primary rates have increased extension and liquidity risks, even as production coupons begin to attract bargain hunters. The implied probability of an October rate hike has risen to roughly 70%. And just how much economic weakness is the Fed willing to tolerate before changing course? What happened from 2022 to 2023 suggests that the Fed may or will tolerate considerable stress in housing, equities, and other rate-sensitive sectors before easing if inflation remains its priority. There's also a competing argument that current inflation is being driven less by excess domestic demand and more by temporary supply-side forces, i.e., tariffs, geopolitical energy and food shocks, and the AI investment build-out. While wage growth is slowing and housing price gains remain modest. If so, further rate hikes could or would do little to address the underlying inflation drivers while increasing damage to interest rate sensitive parts of the economy. The market is therefore searching for the point at which restrictive policy finally produces some visible economic cracks. Because until those cracks emerge, 5% plus treasury yields may be increasingly difficult to dismiss as merely a temporary spike. For today's interview, I wanted to welcome to the show Falcon Capital Advisors, Sam Valverde, to talk about the general importance of the bond market, give us an analysis of recent rate hikes, talk about future fixed income projections, and warn of potential downstream risks to the housing market. He's managing director at Falcon Capital Advisors. And before joining Falcon, he was vice president for industry engagement at Freddie Mac, where he led the single family division's Affordable Lending Group. Valverde is also a non-resident fellow at the Urban Institute. He's previously served in leadership roles within the federal government. And across his career in public service, he's worked to develop market-based solutions to improve economic outcomes for all Americans. Most recently, he led Ginnie Mae as acting president, serving as the enterprise's first Latino executive. Robbie ChrismanLet's start with a little bit of your background. You obviously spend a lot of time on rates. I'm wondering how you got into this market. Give people your origin story. Sam ValverdeI've been working on housing finance issues for a long time, uh, mostly in the government. But I got my start at the Treasury Department where I worked on housing finance and like Treasury debt market issues significantly. We were in the Obama administration, you know, handling a lot of debt concerns vis-a-vis Congress. We worked through two different debt limit impasses during the Obama administration in 2011 and 2013 when I was part of a team that worked on those issues alongside, you know, general debt management policy questions and setting the offering calendar and things like that. So I've been following treasury debt markets since I got to DC in 2010. It's just gotten much more important for the general public and also for housing, right, in the last um 18 months, especially. So it's good to have that background. Um, but that's sort of where I cut my teeth in terms of policy work, is working through debt issues and sort of how to think about the treasury market function from my days at the Treasury Department. Robbie ChrismanHow important is the bond market? Sam ValverdeSure. So I'd say first, the treasury market is important to everyone at all times because it is the reserved debt instrument of the world. And part of that means that it informs all other forms of credit going forward because the treasury debt market is perceived as the risk-free debt market. Everything is built on top of that. So your mortgage really tends to track the 10-year mortgage, uh, 10-year treasury bond. And that's because mortgages might be 30 years, but they tend to refinance out much earlier than that, right? So they tend to have a useful life of like seven to 10 years. So the 10-year treasury bond is really, really critical to how you think about the main ingredient in determining mortgage rates. I think you know, uh Chair Warsh at the last Fed meeting said that the 10-year bond um is the most important price on the planet. And that's part of why, right? Because it is both a building block in general to finance generally, but also it is a critical component in thinking about mortgage rates. Why has it become so important over the last year and a half or so? Sure. Well, we've been through a pretty challenging high-rate environment. I think in housing, we've been waiting for rates to fall for a while now, and that's not happened, right? So, you know, just take a step back, we went through a pretty intense period of economic uncertainty, you know, due to the COVID pandemic, but that ended up yielding an incredibly low rate environment, both generally and certainly in housing, right? With a massive refi boom reflecting that. We, you know, had a really whole of government response to COVID. It was an unprecedented public emergency, an unprecedented public health crisis. And, you know, there were times there at the very, very beginning of it that we thought the economy would look fundamentally different after. That necessitated a really robust response from the government and from the Fed. So we got massive easing and massive amounts of stimulus, right? In the terms of borrower support, rental support, and support for the financial sector. And that response worked really well, but it kicked off inflation that we at first policemakers thought was transitory. It was not. And so I think that's fundamentally a good problem to have. The alternative would have been an anemic response or an insufficient response to the COVID pandemic, and that would have yielded a lasting recession. So, in terms of the problems you want to have, I'd rather be fighting inflation after breaking the back of a potentially super significant financial crisis over, you know, trying to work your way out of it, muddling through because the response was not strong enough. That said, inflation, when it sets in, is really persistent and sticky. And we've been living through that. And so the 22-23 environment was really challenging for markets and for people because we saw the Fed fighting inflation really aggressively, and we didn't necessarily know when that was going to end. You know, by 24, we were in a stable rate environment, high rate environment, stable. And now in 2026, we're fighting inflation again. And we have a host of other policy um choices that are informing, you know, both the high rate environment and inflation, right? We have a conflict in Iran that's affecting the price of oil, which has an inflationary impact. And you're seeing that in rates as well. And in fact, that most recent rise in rates really coincides with that conflict, right? That was an unexpected financial shock that we did not see coming, though the conflict has not resolved itself yet. And even now it's starting to expand a bit across the region and affecting other oil transition channels. So I don't expect that that policy factor is going to change in the near term. And that means that we're going to have pressure on rates from just the oil scarcity going forward. But also, as with any fiscal set of concerns, fiscal, I wouldn't say crisis, but fiscal challenges, you know, once the bond market starts thinking about one set of concerns, it can often uncover or reinstate other concerns, right? So, you know, we've never really had a working process on our fiscal outlook over the last 20 years or so. That's not really been a massive concern for investors up until recently, right? They sort of figured on the 30-year bond that over time we would work on fiscal consolidation. You know, now we are looking at um Social Security becoming severely impaired over the next three or four years. We have not resolved that. There's not a lot of political will around that, at least not yet. And similarly, now that we have had this run-up in rates due to the conflict in Iran, I think long-term bond investors are starting to look at our fiscal outlook and wonder at what point is the government going to start challenging itself to work on either raising revenue or reducing spending or both, so that we can think about the fiscal trajectory differently. Because as of right now, I think uh Chair Powell said this in March, the actual debt load is not unsustainable, but the trajectory is, right? So I think bond investors are looking for some indications that the fiscal outlook is is going to change that won't be solved overnight. But that's, I think, uh, an important uh thing that they're looking for, you know, in the in the near term is some direction and some political will towards uh managing um our fiscal outlook a little better. Robbie ChrismanI'm going to ask you what has caused the recent uptick in rates. And obviously there's a confluence of factors, which you alluded to. It's not as simple as saying, well, the price of oil going up means the energy-driven inflation should go up, so that rates will go up. There is also how hawkish is the Fed going to be. Obviously, they hiked at their most recent meeting. Bond yields weren't, or I guess vigilantes, bond traders weren't that satisfied. They've basically said, well, yields are going to go up because we need to be compensated for what we perceive as additional risks. Scott Bessent said, let's do some buybacks here in the market. And I guess Scott Bessent was saying, we are the house, and the treasury, uh the overall market was saying, you're not the house. Watch this, yields will go up. But you're obviously the expert here, not me. And I bumbled through that a little bit. Thoughts on what has caused this recent uptick in rates from your perspective? Sam ValverdeThe most recent run-up over the last several months, I think a lot of it can be attributed to the conflict in Iran. I think that was a shock that folks were not anticipating. The conflict, you know, came out of nowhere at the end of February when rates seemed like they would be easing. Before that conflict, most uh prognosticators were predicting a set of rate cuts through the year, but obviously didn't have that, right? So part of it is just the pure inflationary impact of having oil supply constrained. That's part of it. The other part of it isn't that the relative uncertainty from that. So, you know, we don't know when the conflict will end. If we did, we could price that in. At the same time, we also have to deal with, you know, something that I think is a mild factor in this, which is increasing use of debt to finance hyperscalers, you know, increasing need to support um further growth of data centers for continued momentum on AI development. Those issuers of um debt are what we'd call rate insensitive. So, you know, the idea is that the benefit of and the profitability of further AI development is so certain and likely so robust that those issuers are gonna go to market issuing debt irrespective of the rate environment. So a 5% bond rate, 6%, 7%, 8% is not going to dissuade them from issuing that debt because they need that debt to fund and finance these data centers and continue the momentum around AI. That means that they're always going to be in the market. And so that is another source of high grade corporate debt. And institutional capital, you know, only has so much allocation to give. So that is potentially taking up some of the demand for U.S. Treasury debt, right? So that is that is a mild um factor in this. The other is, you know, general inflationary pressure from tariffs, right? And tariff uncertainty has increased again as we engage in, you know, tariff back and forth with Canada. And it looks like the administration will continue to press on tariffs more. Those generally have an inflationary effect because they increase prices at home. So they devalue the price of money. So that's another factor as well. And then again, you know, I think in light of the fact that we have not been, we've been deficit financing the government for several years now, and that's been the practice, you know, frankly, over decades, there's always been a question among bondholders about when we would start to work on fiscal consolidation that was generally academic. But I think in light of these other policy factors that have come into the fore over the last two years, it's a lot less academic, right? And so we're now, I think, facing the more fundamental question of can we continue to issue debt at this pace? We can probably allocate it, right? Again, the treasury market is incredibly liquid. It is still the safe haven of the world. But demand for that will be modulated by supply. And that means that not that we will have failed auctions, but that means that we will clear those auctions at a different price, right? So rates will continue to increase because of the relative oversupply. So any kind of fiscal consolidation that yields less treasury issuance will also support lowering rates as well. Robbie ChrismanIn your estimation, what happens next? And I'm sorry to ask you that because nobody necessarily knows. A lot of the red lines out there, 10-year Treasury hitting 5%, the 30-year hitting 5.3% or more. A lot of people thought Trump wouldn't cross, or when we saw those lines cross, the Trump administration would change their course in the Middle East or with some of their tariffs. And that hasn't happened. So there's more uncertainty that's been introduced. In your estimation, what happens from here? Sam ValverdeSo I think um that's a great question. I think partly, I'd say the Treasury and this administration have been really focused on market performance. I actually think that when the bond markets have reacted to other instances, for instance, to you know, the first round of tariffs, they've shown an openness to modulating in relation to the to that price action from bond investors. So I do think they're responsive to bond markets, but I do think that the next six months or so are really critical. Um, now that we have the fundamental question about fiscal outlook on the table, you know, I think two things are really critical. I think one, can we work on ending hostilities in Iran? Because right now the war is widening, right? Saudi Arabia hasn't pulled into it. It's impinging on other sources of oil pipelines there, though I'm hopeful that that will you know be fixed in the in the near term. I understand that Saudi Arabia's are working on reopening one of their critical pipelines. A cessation of the conflict will be really helpful, right? It will help you know bring down rates, maybe not all the way from before the conflict, but it will certainly take out a whole lot of global uncertainty and it will lower the price of oil, which will help with rates generally. I think that's critical. That's near term. That said, I don't know that we are out of the woods in terms of the broader fiscal question, the fundamental question remains, especially for as long as we are issuing debt at the levels that we're issuing it. Investors are going to wonder about their longer-term investment and whether you know the the treasury will continue to roll long-term debt at these higher prices. Because again, that's the other part of the question, right? So when bond rates increase, that means that the cost of servicing our debt increases materially, right? We issued so much long-term debt in COVID at a very low price that is maturing. And now to refinance it and roll it over, we have to pay more, given the global interest rate environment, to maintain that debt level. That's critical. So, how do we reduce that rate over time? We address the fiscal concerns that investors have. That is something I think that this treasury is actually quite focused on, right? Uh, Secretary Besson has said now more than once that he's working on a fiscal plan with the OMB director and with the administration. I think that's really, really critical. And I think that everyone who's watching this, both in housing finance and finance generally, should be looking forward to seeing that plan ideally this year. Uh Secretary Besson initially offered that it would take a matter of weeks. He since um recalibrated and so that he could have it in a few months, which to me means after the midterms. I think that plan is going to be the other big thing that we're looking for, besides the cessation of the conflict in Iran. What does that plan look like? Do bond markets think it's credible? You know, is it the beginning of a long-term fiscal solution, reorienting our fiscal trajectory? And if we can do that, if we can show the bond market that, you know, Congress and the White House are focused on increasing revenue, reducing spending, working on that together, then I think we can see markets calm down a lot. They're not going to solve that. That plan is not going to be self-executing. But I think what I would, what I would look for in that plan is uh a set of principles that are agreed upon between the White House and Congress around what they're looking to do long term on bringing down spending and raising revenue, something like a Simpson Bowls process committed to by both houses. And the administration would be really helpful, right, to build that mechanism and let that sort of work its way through and drive some recommendations that the that Congress will take up. Seriously, that's the kind of methodical work that I think the bond market would really respond to. Robbie ChrismanAs you know, this is a podcast for the residential mortgage industry. And so I want to ask you in closing, if we continue down this path, what does that mean for the housing market ultimately? We've already seen volumes this year drop off. The MBA has been forced to lower its origination forecasts. Everything I hear anecdotally on my travels is it's tough. It's tough out there for lenders, it's tough out there for the overall industry. Sam ValverdeIt's been a really challenging environment the last several years, right? And I think the first thing I'd say is that I don't anticipate things are going to get better in the near term. And I think either they're going to get incrementally worse as this fiscal plan is developed, as the war in Iran continues, but the alternative is it gets worse faster. And that's that's what I'd be worried about. So I think, you know, two things. First, we are not starting this cycle from a position of strength, right? The origination market has been really challenging for several years already, right? So, you know, liquidity is already strained for servicers. Um, it's hard to make a new loan, it's only going to get harder in a 7% environment. Second, you know, housing is really important and personal for many people, which means it's political, right? So at the end of the day, if the housing market is managing through a 7% rate environment, uh mortgage environment for a long time. While I could anticipate a lot of policy activity trying to mitigate that, maybe on its own. So one of the things that I think is possible is we've seen the GSEs um buying back their MBS that started with great fanfare earlier in the year. I think it's possible that that might begin again as a way to try to compress mortgage rates. You know, that is on the table. There's capacity for the GSEs to resume that work again. And, you know, even earlier this week, Director Poulty mentioned that he would resume bond buyback activity as well. You know, those kinds of administrative solutions might start becoming more um actively discussed, you know, if we end up in a persistent uh high rate environment for mortgages. Um, at the end of the day, I do I do think you have to work on this as a fundamental matter. So really thinking about the fiscal outlook is going to be critical. But for housing, you know, because it is so politically important right now, we are in an affordability crisis. I could see a lot of new activity around trying to administratively manage uh mortgage rates. Robbie ChrismanAnd that could open a whole can of worms in itself. Sam, I really appreciate the time, man. Ton of valuable insights for listeners. I'd love to have you back on to discuss this more as things develop. But for now, thank you very much. Thanks a lot. Robbie ChrismanBuy down mortgages have become an increasingly important tool for navigating today's affordability crunch, particularly in FHA and VA lending, where they now represent $45 billion, or about 2% of Ginnie Mae to single family universe. The product is less about permanently making a mortgage affordable than temporarily reducing the borrower's rate for one to three years, with sellers, builders, or lenders absorbing the cost. That structure tends to attract stronger credit borrowers, with average FIGO scores around 20 points higher than comparable loans, while also providing some early life prepayment protection. FHA now accounts for roughly two-thirds of the current buy down issuance, and although the loans prepay more slowly during the first 18 months, that protection begins to fade as the temporary rate steps toward the borrower's full note rate, making buy downs an increasingly interesting pocket of the MBS market as lenders and sellers look for ways to bridge the gap between elevated home prices, high mortgage rates, and strained affordability. U.S. consumers are on increasingly fragile footing with the University of Michigan's September sentiment index falling to a four-month low as one-year inflation expectations jumped to 4.6%, and longer-term expectations rose to 3.4%, their highest since May. Energy inflation tied to the Iran conflict, particularly record diesel prices, could intensify the cost of living squeeze by raising transportation and production costs around the economy. This week, markets will focus on core PCE inflation, consumer income and spending, jolts, ADP, ISM manufacturing, and most importantly, Friday's employment report, with payroll growth expected to slow to roughly 95,000 jobs created in September, while unemployment holds near 4.1%. Spending and income remain relatively strong even as consumer confidence deteriorates and inflation expectations rise. We begin the week with agency MBS prices worsen eighth to a quarter from Friday's close, the two-year yielding 4.91, and the 10-year yielding 5.23 after closing last week at 5.16%, up 16 basis points for the week. Let's wrap up with the joke and some housekeeping. It's late fall and the Native Americans on a remote reservation in South Dakota asked their new chief if the coming winter was going to be cold or mild. Since he was a chief in a modern society and never been taught the old secrets. When he looked at the sky, he couldn't tell what the winter was going to be like. Nevertheless, to be on the safer side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect firewood to be prepared. But being a practical leader, after several days he got an idea. He called the National Weather Service and asked, Is the coming winter going to be cold? It looks like this winter is going to be quite cold, the meteorologist of the Weather Service responded. So the chief went back to his people and told them to collect even more firewood in order to be prepared. A week later he called the National Weather Service again. Does it still look like it's going to be a very cold winter? Yes, the man at the National Weather Service replied, It's going to be a very cold winter. The chief again went back to his people and ordered them to collect every scrap of firewood they could find. Two weeks later, the chief called the National Weather Service again. Are you absolutely sure that the winter is going to be very cold? Absolutely, the man replied. How can you be so sure? the chief asked. To which the weatherman replied, the Sioux are collecting crazy amounts of firewood. Thanks again to Gateless for sponsoring this week's podcasts. Gateless provides intelligent automation that gives you the edge, reducing costs, delivering a superior borrower experience, and mitigating risk by automating tasks and decisions historically made by people. To learn more, visit gateless.com.