8.19.26 Loan Production Costs; Polly’s Brandon Story on Capital Markets Tech; Long Bond Rising

Robbie Chrisman Welcome to the Chrisman Commentary Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include the quarterly mortgage bankers' performance report, Don't Look for a Fed Move Next Month, and my interview with Polly's Brandon Story on differentiators among capital markets technology providers. Here, take a listen to a little preview. Robbie Chrisman When you think about disruption in the capital market space, where does the opportunity lie? I remember working at a mortgage capital trading in San Diego, and it was always how do we get more granular? How do we get more transparent? How do we get more efficient? How do we get quicker with these transactions in the capital markets? Where is there still opportunity out there? Brandon Story So it's really across the whole stack, right? When you think about capital markets and you think about all the technology or the products that we utilize in the mortgage lifecycle, it starts with your pricing engine, right? It starts with the the creation of your of your rate sheet. Do you have best X? A lot of shops don't utilize that that type of technology. They're still mired in Excel spreadsheets to generate their best X and populating a rate sheet. So that's that's item number one. Item number two is really as you start going through uh the PPE process. There's some there's some really good PPEs out there, but they're they're kind of static, more or less. And so that's the beautiful thing about poly is being able to solve that granularity function, being able to show loan officers um the best solution for their borrowers. That gets complicated with a lot of PPEs. It's not complicated with poly. From there, you start talking about the lock desk. Lock desks historically are mired in manual processes. They have to a lock it, a lock request occurs, uh, email is generated, it's sent to the lock desk. They have to go uh get that email, understand what's trying to be done, and manually go on a lock a loan or change a parameter of the loan or relock it or renegotiate it or float it down, whatever the case may be, it's all done manually with poly that's that can be fully automated. Uh you don't have to worry about that component. And then as we start looking out, you know, we're getting ready to launch our hedging platform. There's a lot of a lot of good hedging platforms out there, and there's a lot of really bad hedging platforms out there. And so for the folks that are actually hedging their book, this is a tremendous opportunity, I believe, because there hasn't been a lot of innovation in hedging software and hedging technology. It's all kind of either really, it's it's the two main ones out there, right? It's it's going to be your QRM and then your your compass analytics uh folks. Those are the two mainstays that that are driving the markets here. But quite frankly, they're both really outdated and really not capable for what most capital markets risk management needs today. They need absolutely granularity, they need absolute uh help when it turns to managing their book. The spec market has exploded in pipelines across the universe here. It's over 20 to in some cases, 30% of your pipeline could be spec-oriented product. Are you managing that risk correctly? A lot of I would see it, a lot of folks are not managing that risk correctly today. And so there's solutions like that. Uh, our hedging platform is really, I think, is going to be the next innovative disruptor uh that we offer to the market. And it's gonna be a big needed change for some of the legacy platforms that are out there. Robbie Chrisman When we think about strategy, setting strategy, enacting it. It used to be that there was a year out or 18 months or three years or five years. Things are moving so rapidly now. Can you talk about how to set strategy in a space where technology that was good a couple months ago is is now lagging behind what's the cutting edge when when AI is advancing so rapidly? Brandon Story Yeah, that's a that's a great question. So when I when I think about that, I think about you're right, the market is moving lightning fast right now, specific with AI. It's moving lightning fast. Obviously, the mortgage industry is is one of the slower adoption industries out there, um, but that's changing. We're on the we're all on the uh the the drive to to lower our cost, right? When you start thinking about the mortgage dynamic, the revenue component or or what's available in revenue is that's that's that's pretty vanilla, right? There's not a big game changer. We all work from the same TBA pricing stack. MSR multiples are roughly in line with each other. All of the assumptions that uh that we have are all basically in line with each other to develop the the revenue side of the house or the pricing side of the house. Where there's differentiation is gonna be how efficient is your operation? And that's really the drive with the AI technology that's improving today is how do we reduce our most expensive points along the mortgage value chain in terms of all the underwriters, the loan officers, the underwriters, the capital markets personnel, your compliance people, et cetera. You've got to reduce your cost. And that's gonna be the differentiator moving forward is do you have critical scale? Do you have the ability to differentiate your cost function so that you can uh work cheaper, smarter, and faster than your competitors? That's gonna be the differentiator here going forward for the mortgage industry. And that's really where the strategy comes in, right? Is our platform, yes, we're focused on capital markets, but that touches, I view that it touches every aspect of the of the mortgage origination cycle. Can you embrace these products? Can you embrace that efficiency? Can you embrace that technology? And ultimately, that's who's gonna win. That's gonna differentiate who's winning and losing, and that's where at least my head is in terms of strategy uh of this market going forward. Robbie Chrisman From application to close, Jazz X is a new operating model that helps you scale growth, boost productivity, and transform how your team performs. To learn more about the first true end-to-end AI platform built for mortgage, visit jazzx.ai. I remember when drink responsibly meant not spilling it. I remember when mortgage company owners weren't in the headlines as UWM's Matt Ishbia finds himself with getting slammed on Wall Street, but saying his business has never been stronger. And I also remember when AI meant artificial insemination. Speaking of artificial intelligence, everyone's racing to bolt AI onto their lending process. But a lot of people are skipping the boring part that actually matters and it's going to catch up with them. An AI agent that can't explain its own decisions isn't a shortcut. It's a liability waiting for a regulator to find it. I also remember when the cost to produce a loan was less than eleven thousand dollars, where it is now. And I remember when LOs weren't insurance counselors trying to help clients with affordability struggles, not even due to interest rates. Yes, I think we all remember lots of things, while collectively we continue to help thousands of borrowers every day. The Mortgage Bankers Association released its quarterly mortgage bankers performance report. Independent mortgage banks and mortgage subsidiaries of chartered banks recorded a pre-tax net production profit of $973 on each loan they originated in the second quarter of 2026, compared to a net production profit of $727 per loan in the first quarter. Average net production profits remained positive for the fifth consecutive quarter, continuing the industry's turnaround from widespread losses between 2022 and 2024. Overall, mortgage companies are managing to stay in the black. Combining both production and servicing operations, roughly 85% of the more than 330 mortgage companies in the MBA sample posted overall profits. The average pre-tax production profit was 25 basis points in the second quarter, compared to profit of 16 basis points in the first quarter. The average quarterly pre-tax production profit from the second quarter of 2008 to the most recent quarter is 39 basis points. Total production revenue, which includes fee income, net secondary marketing income, and warehouse spread, decreased to 333 basis points in the second quarter, down from 353 basis points in the first quarter. On a per loan basis, production revenues increased to $11,909 per loan in the second quarter, down from $12,626 per loan in the first quarter. Total loan production expenses, that includes commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations, decreased to 308 basis points in the second quarter and 336 basis points in the first quarter. Per loan costs decreased to $10,936 per loan in the second quarter, down from $11,898 per loan in the first quarter. From the second quarter, 2008 to last quarter, production expenses have averaged just under $8,000 per loan. Servicing net financial income for the second quarter without annualizing was $80 per loan serviced, up from $77 per loan serviced in the first quarter. Switching gears slightly, markets are increasingly focused on the long end of the Treasury curve, which fortunately mortgages don't track, as rising inflation concerns, uncertainty in the Middle East, mounting U.S. government debt, and the leverage behind the AI investment boom are all contributing to broader anxiety. The Treasury sell-off and bare steepening of the yield curve that began last Friday remain intact. The 30-year yield reached 5.33% yesterday, its highest level since 2007. Strong stock market performance and AI-related investment continue to support growth and risk appetite. At the same time, softer July payrolls, retail sales, and inflation have reduced expectations for a September Fed hike, although markets still assign roughly a one in three probability given the possibility of a significant August inflation rebound and uncertainty over the Fed's reaction function under Warsh. That tension is keeping the front end of the yield curve supported while leaving the long end vulnerable. Investors appear increasingly comfortable with the higher nominal and real yields, unless a meaningful deterioration in equities or economic growth forces a reversal, making a future correction increasingly likely, even if that reckoning does not appear imminent. Tomorrow's 30-year tips auction represents an important near-term test. The bias remains toward higher long-end yields until demand improves. For today's interview, we wanted to welcome to the show Polly's Brandon Story to talk about differentiators among capital markets technology providers. He recently joined the company as vice president of Strategy. And I'm excited to have him on the podcast today. Brandon Story Yeah, absolutely. So first off, thank you for having me here uh today, Robbie. So yeah, just recently joined. It's been uh it's been uh super exciting. Um, in terms of my background, I've been in the mortgage industry for 28 years, mainly on the capital market side, various roles, responsibilities, etc. My most recent role was at Mr. Cooper. I was the chief investment officer there, and uh really left Mr. Cooper in 2024 and needed a break. So really just was uh enjoying life and trying to decompress from the previous 10 years of my career. Didn't know if I was gonna get back into the mortgage space or not, really. Uh really enjoy traveling and consulting and not having the day-to-day grind. And then uh Adam Carmel called me, oh, back in May, I guess, and started talking about an opportunity at Polly. Really intrigued. One, I think the world of Adam, I think the world of Polly and the team, and more importantly, all of the um the wonderful capital markets centered technology products that they offer and that they are developing. And um it was uh it was an exciting conversation and and you know, one thing led to another. And it was just too good of an opportunity to pass up to be able to ride along the journey with uh the rest of the team here at Polly to really deliver best in class solutions to capital markets folks. The industry is is kind of mired in legacy technology. I view poly as a massive disruptor. So I'm looking forward to helping to bring solutions to the rest of the industry that quite frankly, not a lot of people have utilized in their past because they they've been stuck in mired legacy technology. So that's uh that's the hook. That's uh the exciting part, that's the journey that I want to be a part of. Robbie Chrisman At Mr. Cooper, you served as chief investment officer where you led capital markets and portfolio investment. You've also had roles at Pacific Union, financial MetLife Home Loans, Countrywide for strategy. What is the remit at Polly? What's your focus when it comes to strategy and innovation? Brandon Story So, what I intend to do, and what I what I hope to do is really partner with our sales team first and foremost to help them and be the subject matter expert as it relates to all of our products here at Polly. And then with with that, too, my team will also kind of be the go-between between our operations team and our engineering team. So we're kind of in the middle, right? So we're we're gonna hear the feedback, we're gonna be able to be the subject matter experts with the client, and then obviously take that knowledge and then work our way backwards to our engineering and operations team to continuously improve our product to help meet industry and client-specific needs. So that's really the true goal. And obviously, being able to utilize a lot of that experience that I've acquired uh over the years to really, like I said, format it into a usable structure for our clients and more importantly, our products that we're gonna offer at Polly. Robbie Chrisman I don't even want to get into best X Excel spreadsheet sort of stuff, but but I'm wondering how do they choose between one capital markets provider and another? If everything is such a leap forward from where they are. What how does one cap, or maybe that's the wrong way of asking, how does one capital markets provider set set themselves apart from the others? Brandon Story You kind of mentioned it before. What is that granularity capability? Um, and then when you when you start thinking about capital markets providers, there's a lot in that. So if we're if we're talking about just like the best X function, really it gets really complicated depending on who you are, right? Are you a seller servicer with Annie, Freddie, and and Ginnie? Okay, that's that's uh a tier one. And do you not have a lot of whole loan partners? Well, there's a best X function for that, right? Are you are you really analyzing the buy up and buy downs correctly at the coupon level for your G fee? Are you really analyzing the excess servicing capability if you can retain your servicing? Are you really best Xing that correctly? And do you have the tools to do that? That's one item. Now, if you go down a step lower where say maybe I don't have my tickets with the GSEs and Ginnie, maybe I am a whole loan seller. Well, then you start bringing in a whole other level of complexity of, hey, I've got 10 sellers. Um, I need to ingest all of their pricing on a daily basis. And yes, I need the best exit to create the best rate sheet possible for my sales force. And then two, to execute the best on the back end when I'm selling loans. That gets really complicated. Not a lot of engines can do that. And then you layer on other complexities of a lot of these investors have steps, they have concentrations that you can't breach, AMI requirements, high balance requirements, etc. That adds another dimension of complexity. So it's no longer a two-dimensional type of framework where you can operate off of an Excel spreadsheet and just have a list of investors and which one is the best price. It's really multidimensional now. And then you started adding adding in other components. Do I sell my servicing? Do I co-issue it out? How do I bring in that execution? There's a multidimensional framework there. Not a lot of, at least in my experience, not a lot of capital market systems can do that. Most folks that are trying to really breach those granular levels have had to move off of those archaic systems and create proprietary platforms. That's another nightmare in and of itself. Having a one-stop solution that can do all of that, it's critical. And that's what's going to differentiate a true capital markets platform that can service the full 360 of a firm as opposed to something that's just piecemeal or is just quite frankly used as a database. Um, that's where it's kind of gotten to with a lot of large shops. It's their risk management system is nothing but a database to do mark to market. Robbie Chrisman A double roadmap question for you to kind of wind down this interview here. Roadmap for you on a personal level, getting up to speed at Polly, where your priorities and then Polly's roadmap over the next six or 12 months. Plew us in. Brandon Story Yeah, so my priorities have really been, you know, I've never worked for a technology company. So that's been kind of eye-opening from my perspective, how much they've embraced technology from all aspects, the AI, uh, the ability to share information across the team, uh, being able to work, you know, we're mostly remote. So being able to work remotely seamlessly across the platform, that's been eye-opening to me. That was one of the first things I noticed when I was starting to get up to speed here on day six. The other thing is really ingesting and understanding the products. I knew about their products just from on the other side of the equation, being on the mortgage lender side, but I really didn't know the depths and details of it. So that's been my focus so far. And then two, um, getting to know our clients, the clients that we do have. What can we do to make them better? Um, working with our sales team, et cetera. As you can imagine, it's just a full embrace of the organization and trying to understand each part and parcel. Um, that's been my focus. And then in terms of the second part of your question, what is our roadmap? Well, I kind of mentioned it earlier. The next big thing for us is really going to be our hedging uh platform. That's an exciting piece that we're we're looking forward to launch in the fall. Uh, we're really looking towards that. Again, I think it's gonna be a game changer disruptor, a much needed thing out there for the industry because they've only really got two options. Um, so that that's a that's a big game changer for us. And then looking beyond that, obviously we're we're constantly innovating our PPE. That's our core product. We're constantly innovating on that. We're gonna do iterative improvements to that. Uh the agentic source of of AI coming in. We've got some really aggressive plans on how we can continue to evolve the AI component. Where, you know, in a perfect world, you know, if I had my magic wand, we could automate the the hedging process with with uh you know AI. Really, just to be to be clear, the blocking and tackling of hedging, making sure your duration coverage is there, the trades back and forth, et cetera. Yeah, it's exciting times. And and really we're the we're the holdback because we want to make sure it's right for our customers. Uh, we can move pretty quickly, but we want to be tried and uh tried and and tested before we release to market. Robbie Chrisman I wish you the best of luck. I love the stuff that comes out, Pauly. I love working with Pauly. Uh, hopefully you will as well, and and hopefully we'll talk again soon. So thank you very much. Brandon Story Thank you very much, Robbie. Appreciate it. Robbie Chrisman One thing of note that I missed earlier was that Checker, Truework's parent company, announced the acquisition of Truve, a leader in consumer permissioned income, employment, and asset verification yesterday. Quote, by bringing Truework and Trove together on the Checker platform, we're building a more comprehensive approach to mortgage verification, giving lenders more ways to verify borrowers quickly and efficiently. As we bring Trove's capabilities onto the mortgage platform, you can look forward to high-quality consumer permission data and document verification to give lenders more ways to verify income, employment, and assets. Nothing changes operationally. Your true work team and your service continue as they are today. End quote. July's housing data showed broad-based weakness as housing starts plunged twelve point four percent to a 1.24 million annualized pace, with single family starts declining across every region as higher mortgage rates raised financing costs. While pending home sales also fell larger than expected, 2.3%. The more encouraging 5% increase in building permits, including a 2.5% rise in single family permits, suggests some future supply resilience, but not enough to offset the current slowdown. Meanwhile, industrial production rose amount of 0.2%, indicating continued but subdued manufacturing activity. Falling import and export prices provided a generally favorable inflation signal, particularly the 0.4% decline in import prices, pointing to a cooling economy where housing bears much of the pressure from elevated rates. Today's economic calendar kicked off with mortgage applications from MBA, which were essentially flat last week, falling 0.4%, as a modest 2% increase in refinancing activity was more than offset by a 2% decline in purchase applications, underscoring how elevated mortgage rates continue to keep both refinance and home buying demand subdued. Later today brings weekly crude oil inventories, the results of a $16 billion 20-year treasury bond auction, and minutes from the most recent FOMC meeting. The July FOMC minutes are expected to reinforce that inflation remains the Fed's primary concern, with policymakers seeking clearer evidence of declining core inflation before ruling out a hike. While the recent CPI and PPI data may have eased pressure for now, but August inflation readings will ultimately determine whether the Fed can stay on hold in September. We begin Wednesday with agents and BS prices, a shade better than Tuesday's close, the two-year yielding 4.15, and the 10-year yielding 4.69 after closing yesterday at 4.71%. Let's wrap up with a joke and some housekeeping. Here's some things we know because of TV. When paying for a taxi, never look at your money, just pull out a bill or two and hand it over. It will always be the exact pair. If a killer is looking in your house, it's easy to find them. Just relax and run a bath, even if it's the middle of the afternoon. Even when driving down a perfectly straight road, it's necessary to turn the steering wheel vigorously from left to right every few moments. It doesn't matter if you're heavily outnumbered in a martial arts fight, your enemies will wait patiently to attack you one by one. And when you turn out a light to go to bed, everything in your room will still clearly be visible. Just slightly bluish. Thanks again to Jazz X for sponsoring today's podcast. Jazz X is a new operating model that helps you scale growth, boost productivity, and transform how your team performs. Learn more at jazzx.ai.