7.20.26 Freddie and Fannie Stock; IRA’s Chris Whalen on Servicing Deals; Low Volatility

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include the latest chatter surrounding AI, my interview with the institutional risk analyst Chris Whalen on the Fallout from the two harbor servicing deal, further consolidation in the mortgage industry, and dominoes to fall as companies race to grab market share. And in the capital markets, we're actually seeing volatility at a multi-year low. Why? From application to underwriting, JazzX is a new operating model that helps you scale growth, boost productivity, and transform how your team performs. It's the first true end-to-end AI platform built for mortgage. To learn more, visit jazzx.ai. In 2026, Fannie's stock price is down 44%, and Freddie's stock price is down 46%. Don't sink your 401k into either when doing a re-IPO was the talk of the Trump administration. Speaking of Fannie, rumors are flying that Fannie's latest lender letter on AI will be followed by a more prescriptive framework. One would hope that the industry is input into Freddie and Fannie's activities. Mortgage leaders have limited influence over many of the forces dominating today's housing debate. They cannot directly control interest rates, housing inventory, inflation, or the pace of legislative reform. But they can direct how effectively their organizations prepare for technological disruption. The firms that spend the coming years waiting for external solutions to affordability challenges may find themselves reacting to change rather than shaping it. By contrast, those that invest now in AI-ready operating models, governance structures, and workforce capabilities will be positioned to create lasting competitive advantages regardless of the broader economic environment. Housing policy will remain important, but the defining strategic decisions of the next decade are increasingly likely to occur not in Washington, but within the institutions responsible for financing homeownership itself. Questions surrounding whether AI can classify documents, automate workflows, extract data, or support underwriting decisions have largely been answered. Instead, the industry's attention is shifting toward issues of explainability, accountability, and governance. Mortgage lending has always been a process intensive business in which transparency matters as much as outcomes. Regulators, investors, auditors, and consumers require not only confidence that a decision was made correctly, but also a clear understanding of how that decision was reached. As AI becomes more deeply embedded within lending workflows, the ability to document, reproduce, and explain machine-assisted decisions will increasingly separate sustainable innovation from operational risk. In this environment, governance becomes a strategic capability rather than a compliance exercise, transforming oversight from a defensive function into a source of competitive advantage. Is all this making you rethink how you allocate resources and build long-term capabilities? The best positioned institutions for the next decade are those capable of integrating technological innovation within robust frameworks of accountability and risk management. This is particularly important given the central role of government-sponsored enterprises and shaping standards across the mortgage ecosystem. Technological adoption in housing finance has historically been constrained not by what is possible, but by what can be operationalized at scale within accepted regulatory and secondary market frameworks. Successful lenders will need to balance innovation with institutional discipline, investing in systems that remain adaptable as both technology and market expectations continue to evolve. Speaking of institutional discipline, I want to welcome back to the show the institutional risk analysts, Chris Whalen, to talk about the fallout from the Two Harbor servicing deal, further consolidation in the mortgage industry, and dominoes to fall as companies race to grab market share. He's an investment banker and author, as well as chairman of Whalen Global Advisors. He focuses primarily on the banking, mortgage, finance, and fintech sectors. Let's begin with the UWM Two Harbors, deal, uh cross-country saga. I'm not sure. What's the proper terminology for what we saw happen here, in your opinion? Chris WhalenIt was a kind of a bidding war between two issuers who are very different. Uh, United Wholesale obviously is the king of the wholesale channel, the biggest issuer in the country, uh, the most aggressive on price. And then you had cross country, that's one of the larger retail shops, still has brick and mortar, uh, unlike many issuers who've gotten out of that part of retail. So I think what it came down to was uh United Wholesale started the process. Um, two Harbors was a damaged property. They had a significant deficit on their balance sheet because of a variety of things, litigation, uh, some other mishaps that had caused them to essentially have to sell the company at a discount to the mortgage servicing asset. You know, in theory, their MSR was worth $2 billion. So, you know, they had to unfortunately take a lower price because of the capital deficit. And what happened was the initial bid from United Wholesale, which was an all-stock deal, looked okay, but the stock price kept going down. And so eventually um cross-country comes in with an all-cash offer. And what this did was it forced two harbors and their board to take a look at this, and they realized that the currency that uh United Wholesale was offering the stock was a little bit soft in terms of valuation. Um, you know, Matt has only been able to float a very small fraction of his total equity on the public markets, and the rest is privately held by his company, and he's used it uh for a variety of purposes, including buying the Phoenix Suns. So he's levered up that stock, may have to at some point try and issue it. But meanwhile, through this whole process, which started you know fourth quarter last year, uh the United Wholesale price was falling. So the value of the currency in terms of being able to purchase another company was falling. And I think two harbors was forced to point out the obvious, which is if you want to compete with the cross-country bid, you've got to make it all cash. And obviously, Matt didn't have the cash. Uh, he's very aggressive on price. So he's been spending his cash to maintain that 40% market share he's gotten wholesale. I've been very critical of them for this reason. And he's been selling his servicing assets to raise cash to offset his operating deficit. So that's kind of the short version, you know. Cross country won because they had an all-cash offer. Robbie ChrismanMaybe more interesting, though, for sideline viewers in the industry is what does this portend for UW? Some of people have speculated as much as Matt needed this deal to close for the future of the company to to remain stable and strong. And now that he doesn't have it, there's there's a heck of a lot of uncertainty out there. Your thoughts. Chris WhalenI think that's true. I I think that you know what I've written and I've said consistently, I think, about United Wholesale is that they need to back off on price and accept a slightly smaller market share, but make money. Um, they have been very aggressive, and their brokers love this, obviously, which lets them go out and win loans. But if that means I've got to sell their mortgage assets, you know, the servicing asset below the cost that I had to pay to create it, I don't think that's a very good trade. And I do believe, sure, did they want the servicing platform? Yes. They've been bringing their servicing in-house. I'm not sure what a great idea that is because he's small, you know, relative to the other players in the industry. United Wholesale creates a lot of mortgages, and they could very quickly, I think, build their servicing assets if they wanted to. But because they've had to sell them every quarter to make up the operating deficit, that's, you know, held them back. Um, I don't think they were gonna keep the REIT, which I think would have been a really good idea. They could have created a comp to Penny Mac where you have the issuer, Penny Mac Financial, and then you have a REIT, Penny Mac Mortgage Trust, that can hold conventionals and really anything else except Ginnie Mae. But I don't think he was gonna do that. I think they were just gonna take the mortgage platform, the servicer, which is the old round point business, and um maybe keep the servicing. But again, if he didn't change the pricing on his business model, then he'd end up having to sell the servicing. And I'm not sure that would be a great trade. So I I think what to me, what really came into focus here in this competition over the last six to eight months was the financial downside, the financial vulnerabilities of United Wholesale were brought into very sharp focus. And he had essentially forced all of the buy-side investors that had been in the stock, the analysts, everybody else, to focus on his business. And that I think was a negative. So the fact that he didn't win, that's not good. But also, I think the attention that it brought to him and the stock was bad because you know, stock traded below $2. Uh, and that's not a good thing. Robbie ChrismanWell, where does UWM go from here? Obviously, there's going to be some time to lick wounds, but uh with the stock price being so low, you almost don't have time to kind of sit there and wall in your misery. It's it's on to the next thing. Chris WhalenI I think they've got to think long and hard about their business model and ask themselves a basic question. Would we be happy with 20 or 25% market share, which is still a huge slice of the business, and then making money, which means they have to change their pricing. Now, I will tell you that I have seen a number of issuers get back into wholesale in the past year, which you know they wouldn't have done before because Matt's bid was so high that the only way you could compete with him would be to lose a lot of money. And I think most issuers who are more attentive to keeping their business uh, you know, balanced, if you will, wouldn't do that. But you have seen some players get back into wholesale this year. So that tells me that they're probably already easing up on price. And I think the real question is, you know, Matty Shabbat loves basketball. He he's an athlete. He loves to compete. And now he's the owner of the Phoenix Suns. If it was up to me, I would tell him to sell the mortgage business because the Suns have gone up in value dramatically over the last few years. He could probably refinance the whole structure, take the uh leverage off of the mortgage company, and then I would sell it. I'd call up the guys at City and see if they want to get back into mortgages. Because he has he's created a very efficient funnel for gathering and processing mortgages. But I think, you know, to me, the the more conservative players in the industry, the Stan Middlemans, the guys at Rocket, they've got it right because they keep their balance between operating expenses and continuing to create value in terms of building book value. If you see a shop that is eating cash on an operating basis, to me, that's not a long-term strategy. Uh, especially now that we're, you know, we're staring at uh the 10-year at four and a half. Uh, I think it's likely that rates are not going to come down in the bond market. But on the other hand, if you look at bank earnings this quarter, the yields on bank assets continue to fall. The earning assets of US banks have been falling for six quarters. I don't know what this tells us. I think it's a deflationary signal. But the bond market, all by itself, without the Fed, without Kevin Walsh, took yields up half a point. And I'm not sure that's going to change anytime soon. So everybody who is keeping dry powder, Robbie, waiting for rates to fall so they go out and make lots of money, that may not happen. So I think you have to manage your business to profitability. Robbie ChrismanThere's a lot to unpack there. With the UWM stuff, it makes me think of the old adage, sell when you can, not when you have to. And I wondered what investor wants to catch a falling knife in some sense. It also speaks to well, no, go ahead. Chris WhalenNo, but it's a very efficient Matt has built a very efficient platform. There's value there, and he has value in his MSR portfolio. So those two assets I think are very saleable. The question is, does he want to do that? I think he's very proud, and he, you know, he wanted to build a market leader, and he did. But the trouble is, is that if you're selling your servicing asset in this market, I think you're making a mistake. Because the people I really respect in this business, you know, I wrote that bio about Stan Middleman. Yep. Uh, they they think about the yield on their MSR before they think about the loan. That's the bottom line. Robbie ChrismanI and I appreciate the the signed copy of uh your book on Stan that you sent over to me. So thank you for that. My pleasure. But this this speaks to the future of mortgage lending or the model that will work. You mentioned Pennymacinit's remodel. You talked about operating expenses within companies like freedom. We've seen the market take a bit of a distaste toward UW and consolidation is obviously a topic that will be ongoing. And this can tie into some of the capital requirements stuff. But I'm, you know, banks used to be such big players, and now they've, for all intents and purposes, essentially exited the mortgage space. What do you see as the model of the future winning out? Is there still a place for small and independent mortgage bankers? Is it going to be just a consolidation grab until we're left with a handful or a dozen or a couple dozen large companies? How do you see the future of lending playing out? And what model do you think will ultimately be the one that wins out? Chris WhalenI think the smaller firms are almost forced to get out of the servicing business and really just focus on production. That means they're essentially going to be brokers. Can they close loans in their own name? Can they have warehouse lines and gestation lines and things of that nature? Yes, they can. But you know, the servicing business is such a scale business today that if you don't have at least half a trillion dollars of UPB in your house, then I think you're you're a target to get acquired or at least be forced to sell your servicing. A lot of smaller firms that try and play in the secondary market for servicing have to bid very aggressively to win assets today. And I don't think that's a long-term model for survival. So you know, during COVID, there were some smaller firms that actually were able to accumulate servicing and retaining because this the remember, people were giving it away. They didn't want it, they weren't sure about the risk. Um, today, servicing is trading at premium prices. Uh conventionals go from five to six times uh the Ginnie Mays trade a full multiple lower than that. But it really depends. If it's low coupon Ginny May, though you can get some very impressive prices for those assets. So I think, you know, all of the major uh shops, the top 10, if you will, you're gonna see consolidation there. There are some weak hands that have not been managing their businesses for profitability, and they're gonna be forced to trade at some point. Then you have the next 10 to 20 below them. Can they stay in the servicing business? I think the only way is by sub-servicing the assets out and letting somebody else do the work, and then you keep what's left. Um, I cannot see a small shop staying in it. Now, if you're talking about small banks and you're talking about what they originate in terms of their retail channel, which is where most banks operate today, very few of them do third party, very few of them do correspondent. You have Western Alliance, you have JP Morgan, which is the biggest bank servicer. But the rest of them are primarily, you know, Wells, all of them are doing in-footprint retail originations, and they'll keep them. U.S. Bank, for example, is a very interesting platform. They've gotten themselves back into line since closing the Bank of California transaction. So they're not going away, but banks are really a quarter of the market, and I don't see them getting any larger. Robbie ChrismanYou've written recently wrote recently about how bank earnings have soared. And that also ties into I'm perusing your old writings in my free time for fun. Bank capital requirements have also been a topic of late. I believe the comment period ended last month. What changes do you see to capital requirements and what's the ultimate impact we'll see on mortgage lending as a result? Chris WhalenWell, what the Fed has proposed, this is Mickey Bowman's project, the vice chair for supervision, is that you're not going to have to subtract the MSR, the MSR above the cap, if you will, from your capital. Um, this is an approach that the bankers took, you know, more than a decade ago with Basel, and it reflects a European perspective on housing. Europeans don't accept intangible assets. They don't even allow you to put them on the balance sheet. You if you bought servicing in Europe, you'd have to expense it up front. That's the way they do it. So I think that what happens is it's going to take pressure off small and mid-sized banks who want to retain their servicing when they make a loan to a customer, uh, which I think is for the good. But it's not going to get them back in the game in terms of third-party originations, which they view as high risk because you're buying an asset from somebody else and you're not quite sure about it. Um, and you may see some banks selectively purchasing third-party servicing and retaining it. That to me is a good thing. Uh, but I don't really see it changing much else, Robbie, because you know, it's again, servicing is such a scale business that most banks, especially the community bankers, are going to hire somebody else to do the servicing on a white label basis, put their name on the statement, right, and take the you know, the onus off them. They'll keep the escrow balances, they'll keep the net servicing strip, which I think is extremely important for banks. Um, but other than that, I don't see much change. I've said to the folks at the Fed, I filed comments on on Basel, that they ought to just take the uh the uh capital weighting, which is 250% right now, down to 100. 100 is where uh equity is. What does 100 mean? It means 8% capital for every $100 for the assets. So $8. Um, but you know, it's tough for them to do that because politically in this country and also with respect to the other nations that participate in the Basel Accord, that would be a big change. And yet I think it's justified because the servicing assets, as you know, you've seen what I've written about them, to me are an extremely important asset for a bank. The issue is does the management team understand them? And this is not just servicing, this is mortgage-backed securities and loans. Do you remember Silicon Valley Bank? What happened with them? They had 40% of their book in mortgage-backed securities, and they weren't paying attention. So the bank failed. That to me is the issue. We need an idiot test for bankers that says, do you understand variable duration assets? Come here and talk to me about your strategy. Uh a great example of this is Mike Dubeck at Planet. Mike has got one of the best mortgage shops in the industry and he understands hedging. He worked at Morgan Stanley. So when you look at the way they approach risk management, they are light years ahead of many even larger issuers than Planet. But that's because he worked on the street, he owns a Bloomberg terminal, he understands how to use it, right? To me, that's the issue with servicing. If the owner of that asset doesn't understand the risk of having something that can change duration in the blink of an eye, then they shouldn't be involved. Robbie ChrismanAnything else that's on your mind? We were speaking offline a little bit. I think you mentioned kind of this gold rush and DSCR and non-QM. Maybe that's a good place to close. From your perspective, what do you see in there? Is it good for the industry? Does it give you pause? Where's your head with all that? Chris WhalenYou know, it's funny. I've written a lot about DSCR recently. I my concern is that the land rush in these loans is pushing up asset prices in certain markets. You also have the issue of whether or not the purchaser is going to live in the house or actually rent it out as a business uh uh you know purpose loan. I I I'm gonna continue to watch this carefully because you know the business purpose. Loans have a much lower uh regulatory load. You don't have to deal with all the stuff you do with the Resi, which is why they're attractive. You have every insurance company on the planet uh clamoring for this stuff funds. So the crowd is big. As Kane said, demand creates supply. And we've seen this movie before, Robbie. So, you know, I worry that it's kind of frothy at this point and that it may indicate that we will have problems in the future. Robbie ChrismanWise words, as always. Chris, thank you very much for the time. You know, I I very much value your contributions to this industry, and it's always a pleasure having you on the podcast. So thank you. My pleasure, Robbie. Let's do it again. While rates were a little up and down last week, overall bond market volatility is the lowest it has been since 2021. And that makes capital markets teams pleased. Resumption of U.S. Iran hostilities, the subsequent biggest weekly advance since April for crude, softer than expected CPI and PPI reports, treasury yields and mortgage rates climbed to open the week as extension risk widened MBS spreads, but quickly reversed by effectively taking a July Fed rate hike off the table and allowing treasuries and agency mortgage-backed securities to recover most of their losses. Fed chair Kevin Walsh and other policymakers reinforced the disciplined data-dependent message while avoiding any new policy signals, leaving markets to conclude that the Fed is content to wait on any rate changes for now. Tariffs, Middle East energy risks, and AI-related inflation kept mortgage-backed security investors cautious, as elevated rates reduced refinancing incentives, weakened specified pool payups, and kept extension risk in focus heading into this quieter week that will be more responsive to geopolitical developments than economic data. Though there is still a lot of economic data for the Fed and markets to digest. Consumer sentiment improved in July as lower gasoline prices lifted confidence across demographic groups, although renewed tensions in the Middle East could quickly reverse that trend if energy costs rise again. Industrial production remained sluggish with manufacturing output flat for the first time since January. Sharp rebound in overall housing starts, which were up 19% in June, was driven almost entirely by multifamily construction, as single family starts and permits remained weak amid ongoing affordability challenges. Import prices unexpectedly accelerated in June, pushing annual import inflation to its fastest pace since August 2022, and reinforcing that price, pressures have not fully subsided, although underlying components continue to support expectations for a relatively benign core PCE reading. With inflation still viewed as the central risk to the economic outlook, this week brings a relatively light economic calendar, but one that will still deliver fresh evidence of the economy's underlying momentum and the Fed's next policy move. This week's economic calendar kicks off today with leading or the leading economic index, which will reveal future growth prospects. The highlight of the week will be Friday's Flash PMI surveys and June new home sales. We begin the day with agency MBS prices, little change from Friday's close, the two-year yielding 4.17, and the 10-year yielding 4.55 after closing last week at 4.54%, down three basis points over the course of the week. Let's wrap up with a joke and some housekeeping. I wondered what my parents did to fight boredom before the internet. So I asked my 18 brothers and sisters, and they didn't know either. Thanks again to JazzX for sponsoring this week's podcasts. JazzX is the first true end-to-end AI platform built for mortgage and from application underwriting. It's a new operating model that helps you scale growth, boost productivity, and transform how your team performs. To learn more, visit jazzx.ai.