analysis

Apache is functioning normally

The Heston model is an options pricing model developed to address some of the shortcomings in the Black-Scholes model when pricing European options. In contrast to the Black-Scholes model, the Heston model uses stochastic, not constant, volatility as a key variable to determine option prices.

Developed by mathematician Steve Heston in 1993, this model is thought to be more real-world in nature since implied volatility percentages change during an option’s life. However, the Heston model is just one of many option valuation techniques to consider.

What Is the Heston Model?

The Heston model is used to gauge the value of options. The main difference between this and other models is how volatility is treated. The Heston model for option pricing assumes that volatility is stochastic, or random. That simply means that volatility is treated as a variable, in contrast to other models that assume constant or local volatility.

Option prices are made up of several variables — often referred to as the Greeks. It is important to understand price inputs in order to know how to trade options. Volatility is a major piece of the price of an option. The higher the implied volatility, the more valuable the option is. The Heston approach accounts for this by assuming there is a relationship between a stock’s price and its volatility.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options trading account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

How Does the Heston Model Work?

By assuming that volatility is random, many traders believe the Heston option pricing model works better than the Black-Scholes model since it captures the true nature of volatility. The Heston approach is considered a superior model to the Black-Scholes, too. The downside is that it can be more complicated to calculate. Moreover, it can only be used on European options — those that can be exercised only at expiration.

Like other option pricing models, the Heston method attempts to determine the time value piece of an option’s total value. Intrinsic value is straightforward to figure out since it is just the difference between the stock price and strike price. Intrinsic value and time value comprise an option’s total worth.

Heston Model Pros and Cons

The Heston option pricing model has several advantages and disadvantages. By incorporating variable volatility characteristics, an options trader can have more confidence in the Heston model’s output reflecting observed market behavior versus other valuation techniques. The Heston model achieves increased accuracy by considering correlations between the price of a stock and its volatility. It also assumes that volatility exhibits mean reversion.

Additionally, Heston’s approach yields a closed-form solution that can simplify what is a complex mathematical equation.

The Heston model has its limitations. For one thing, the output is only as good as the variables you assume. This model is also thought to be ill-equipped to price options close to expiration due to instances when implied volatility might be extremely high.

Perhaps the biggest downside is its complexity versus Black Scholes and the binomial options pricing model.

Pros Cons
Incorporates more realistic market conditions such as changing volatility levels Only useful on European-style options
Prices options considering the price and maturity variables on volatility Only as good as the inputs used
Yields a closed-form solution that can be used to compare an option’s value to its market price Considered not an accurate gauge to price short-term options with high volatility

Heston vs Black-Scholes Model

Understanding the differences between the Heston model and the Black-Scholes model can help you determine which might work best when you trade options.

Heston Model Black-Scholes Model
Assumes that volatility is random Assumes that volatility is constant
Incorporates a relationship between a stock’s price and its volatility Does not incorporate correlations between a stock’s price and volatility
Can be used in a variety of market conditions Prices options under one set of volatility parameters

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

Heston Model Formula Explained

The Heston volatility model includes several mathematical inputs. Knowing these can help you find the right strategies for trading options. Understanding the model inside and out can arm you with the quantitative armor other traders might not possess.

Here is the full Heston model formula:

Where:

•   St = specific asset price at time t

•   r = the risk-free interest rate, often a short-term Treasury rate

•   √Vt = volatility (standard deviation) of the asset

•   σ = volatility of volatility

•   θ = long-run price variance

•   k = reversion rate to the long-term price variance

•   dt = indefinitely small positive time increment

•   W1t = Brownian motion of the asset price

•   W2t = Brownian motion of the asset’s price variance

Note that the two Brownian motions are negatively correlated. For example, a drop in the asset price will see an increase in volatility. The two Brownians are related by the following equation:

Where ρ is the correlation.

In his original paper describing this model, Heston provided default parameters for the equations above which include:

•   St = 100

•   r = 0

•   Vt = 0.01

•   σ = 0.1

•   θ = 0.01

•   k = 2

•   ρ = 0

•   Option maturity = 0.5 year

Further calibration of the model requires advanced mathematical analysis.

Other Option Pricing Models

The Heston option pricing is just one of many approaches to consider. Let’s outline several of the most common methods you might use to price options.

Binomial Model

The binomial model uses an iterative approach using several periods to value American-style options. It follows a binomial pricing tree, which can be useful in illustrating how option prices change from one period to another. This method is considered intuitive and is used more often than Black-Sholes.

Risk-Neutral Probability

The risk-neutral approach to option pricing assumes that risk is not considered. This method can help a trader assess the true value of an option outside of market risk conditions.

Monte Carlo Simulation

Monte Carlo simulations are sometimes used to gauge the value of options. This method utilizes computer simulations to create thousands of potential outcomes. Option values can be calculated based on the probability-weighted computer output.

Monte Carlo simulation is used to generate realistic market conditions which can be useful for options traders as they attempt to assess how an option value will fluctuate over time. However, it can be time-consuming and costly to run these complex programmatic scenarios.

The Takeaway

The Heston model prices options using stochastic (random) volatility to more accurately model options pricing behavior. The more well-known Black-Scholes option pricing model assumes that implied volatility remains constant.

Some traders believe that the Heston model approach works better to incorporate practical, real-world conditions. Still, there are many techniques to price options for you to consider when you trade.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

With SoFi, user-friendly options trading is finally here.

FAQ

What is the Heston model used for?

The Heston Model is used for pricing European options. It uses stochastic volatility to arrive at pricing outcomes, helping traders value options. If a trader determines that an option is over- or under-valued, they might sell or buy the option, then hold it through expiration or trade out of the position before expiration. It is important to remember that European options, unlike American options, cannot be exercised early.

Is the Heston model better than Black-Scholes?

It’s hard to conclude that the Heston stochastic volatility model is better than the more widely known Black-Scholes model. In contrast to Black-Scholes, the Heston model assumes that volatility can change. The Heston model can be more useful to traders since it assumes implied volatility, an important variable for options pricing, increases as options become more in-the-money or out-of-the-money. While the Heston model is considered to be more accurate, it comes with increased computational complexity or in layman’s terms…it’s slower.

What does stochastic local volatility mean?

Local volatility is a basic application of the Black-Scholes model. It accounts for the requirement to price-in skewness into option values. Stochastic volatility contrasts local volatility in that the former can produce a more real-world forward volatility profile. It’s thought that stochastic volatility can overprice options while local volatility and the Black-Scholes method might underprice options.

Photo credit: iStock/FG Trade

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0322020

Source: sofi.com

Apache is functioning normally

The Heston model is an options pricing model developed to address some of the shortcomings in the Black-Scholes model when pricing European options. In contrast to the Black-Scholes model, the Heston model uses stochastic, not constant, volatility as a key variable to determine option prices.

Developed by mathematician Steve Heston in 1993, this model is thought to be more real-world in nature since implied volatility percentages change during an option’s life. However, the Heston model is just one of many option valuation techniques to consider.

What Is the Heston Model?

The Heston model is used to gauge the value of options. The main difference between this and other models is how volatility is treated. The Heston model for option pricing assumes that volatility is stochastic, or random. That simply means that volatility is treated as a variable, in contrast to other models that assume constant or local volatility.

Option prices are made up of several variables — often referred to as the Greeks. It is important to understand price inputs in order to know how to trade options. Volatility is a major piece of the price of an option. The higher the implied volatility, the more valuable the option is. The Heston approach accounts for this by assuming there is a relationship between a stock’s price and its volatility.

💡 Quick Tip: In order to profit from purchasing a stock, the price has to rise. But an options trading account offers more flexibility, and an options trader might gain if the price rises or falls. This is a high-risk strategy, and investors can lose money if the trade moves in the wrong direction.

How Does the Heston Model Work?

By assuming that volatility is random, many traders believe the Heston option pricing model works better than the Black-Scholes model since it captures the true nature of volatility. The Heston approach is considered a superior model to the Black-Scholes, too. The downside is that it can be more complicated to calculate. Moreover, it can only be used on European options — those that can be exercised only at expiration.

Like other option pricing models, the Heston method attempts to determine the time value piece of an option’s total value. Intrinsic value is straightforward to figure out since it is just the difference between the stock price and strike price. Intrinsic value and time value comprise an option’s total worth.

Heston Model Pros and Cons

The Heston option pricing model has several advantages and disadvantages. By incorporating variable volatility characteristics, an options trader can have more confidence in the Heston model’s output reflecting observed market behavior versus other valuation techniques. The Heston model achieves increased accuracy by considering correlations between the price of a stock and its volatility. It also assumes that volatility exhibits mean reversion.

Additionally, Heston’s approach yields a closed-form solution that can simplify what is a complex mathematical equation.

The Heston model has its limitations. For one thing, the output is only as good as the variables you assume. This model is also thought to be ill-equipped to price options close to expiration due to instances when implied volatility might be extremely high.

Perhaps the biggest downside is its complexity versus Black Scholes and the binomial options pricing model.

Pros Cons
Incorporates more realistic market conditions such as changing volatility levels Only useful on European-style options
Prices options considering the price and maturity variables on volatility Only as good as the inputs used
Yields a closed-form solution that can be used to compare an option’s value to its market price Considered not an accurate gauge to price short-term options with high volatility

Heston vs Black-Scholes Model

Understanding the differences between the Heston model and the Black-Scholes model can help you determine which might work best when you trade options.

Heston Model Black-Scholes Model
Assumes that volatility is random Assumes that volatility is constant
Incorporates a relationship between a stock’s price and its volatility Does not incorporate correlations between a stock’s price and volatility
Can be used in a variety of market conditions Prices options under one set of volatility parameters

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

Heston Model Formula Explained

The Heston volatility model includes several mathematical inputs. Knowing these can help you find the right strategies for trading options. Understanding the model inside and out can arm you with the quantitative armor other traders might not possess.

Here is the full Heston model formula:

Where:

•   St = specific asset price at time t

•   r = the risk-free interest rate, often a short-term Treasury rate

•   √Vt = volatility (standard deviation) of the asset

•   σ = volatility of volatility

•   θ = long-run price variance

•   k = reversion rate to the long-term price variance

•   dt = indefinitely small positive time increment

•   W1t = Brownian motion of the asset price

•   W2t = Brownian motion of the asset’s price variance

Note that the two Brownian motions are negatively correlated. For example, a drop in the asset price will see an increase in volatility. The two Brownians are related by the following equation:

Where ρ is the correlation.

In his original paper describing this model, Heston provided default parameters for the equations above which include:

•   St = 100

•   r = 0

•   Vt = 0.01

•   σ = 0.1

•   θ = 0.01

•   k = 2

•   ρ = 0

•   Option maturity = 0.5 year

Further calibration of the model requires advanced mathematical analysis.

Other Option Pricing Models

The Heston option pricing is just one of many approaches to consider. Let’s outline several of the most common methods you might use to price options.

Binomial Model

The binomial model uses an iterative approach using several periods to value American-style options. It follows a binomial pricing tree, which can be useful in illustrating how option prices change from one period to another. This method is considered intuitive and is used more often than Black-Sholes.

Risk-Neutral Probability

The risk-neutral approach to option pricing assumes that risk is not considered. This method can help a trader assess the true value of an option outside of market risk conditions.

Monte Carlo Simulation

Monte Carlo simulations are sometimes used to gauge the value of options. This method utilizes computer simulations to create thousands of potential outcomes. Option values can be calculated based on the probability-weighted computer output.

Monte Carlo simulation is used to generate realistic market conditions which can be useful for options traders as they attempt to assess how an option value will fluctuate over time. However, it can be time-consuming and costly to run these complex programmatic scenarios.

The Takeaway

The Heston model prices options using stochastic (random) volatility to more accurately model options pricing behavior. The more well-known Black-Scholes option pricing model assumes that implied volatility remains constant.

Some traders believe that the Heston model approach works better to incorporate practical, real-world conditions. Still, there are many techniques to price options for you to consider when you trade.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

With SoFi, user-friendly options trading is finally here.

FAQ

What is the Heston model used for?

The Heston Model is used for pricing European options. It uses stochastic volatility to arrive at pricing outcomes, helping traders value options. If a trader determines that an option is over- or under-valued, they might sell or buy the option, then hold it through expiration or trade out of the position before expiration. It is important to remember that European options, unlike American options, cannot be exercised early.

Is the Heston model better than Black-Scholes?

It’s hard to conclude that the Heston stochastic volatility model is better than the more widely known Black-Scholes model. In contrast to Black-Scholes, the Heston model assumes that volatility can change. The Heston model can be more useful to traders since it assumes implied volatility, an important variable for options pricing, increases as options become more in-the-money or out-of-the-money. While the Heston model is considered to be more accurate, it comes with increased computational complexity or in layman’s terms…it’s slower.

What does stochastic local volatility mean?

Local volatility is a basic application of the Black-Scholes model. It accounts for the requirement to price-in skewness into option values. Stochastic volatility contrasts local volatility in that the former can produce a more real-world forward volatility profile. It’s thought that stochastic volatility can overprice options while local volatility and the Black-Scholes method might underprice options.

Photo credit: iStock/FG Trade

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0322020

Source: sofi.com

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Source: goodfinancialcents.com

Apache is functioning normally

San Francisco-based fintech Polly has hired Parvesh Sahi, a former executive from ICE Mortgage Technology, as chief revenue officer to scale the business in a highly competitive mortgage environment. 

Sahi will be involved in all aspects of the corporate strategy, business development, sales and account management, the firm said Thursday. Sahi brings to the role more than 10 years across multiple executive positions in sales, strategy, client management and business development teams at companies including ICE Mortgage Technology and Ellie Mae. 

In his management roles, Sahi helped to identify and execute on multiple key acquisitions and remained committed to driving mortgage innovation, a responsibility that will continue at Polly, the firm said. 

“I have no doubt that he will be instrumental in institutionalizing and scaling key areas of our business,” Adam Carmel, founder and CEO of Polly, said in a statement.

Prior to joining Polly, Sahi spent 11 years in executive roles at ICE Mortgage Technology, where he led sales, strategy, client management, and business development teams across the Ellie Mae, MERS, and Simplifile brands. Ellie Mae was acquired by Intercontinental Exchange (ICE) in September 2020.

“One of the many things that attracted me to Polly is the company’s genuine commitment to product execution and delivering on client expectations to meet the evolving needs of lenders, and the industry as a whole,” said Sahi.

Polly, a software-as-service mortgage technology firm that operates a product and pricing engine (PPE) and loan-trading exchange, initially launched in 2019. Since then, the California fintech raised about $57 million in three rounds of funding.

In January 2022, the firm raised $37 million in Series B funding, led by venture capital firm Menlo Ventures. Movement Mortgage, First American Financial and FinVC also joined existing investors 8VC, Khosla Ventures and Fifth Wall. 

The SaaS firm teamed up with mortgage insurance providers, including Arch MI, Enact and National MI, to streamline the mortgage process of calculating, quoting and comparing mortgage insurance offerings. 

In its latest move to drum up business for lenders, Polly and Mortgage Coach teamed up on a new application programming interface (API) last year. The new API integration feeds real-time data from Polly’s cloud-based PPE into Mortgage Coach’s total cost analysis (TCA) presentation.

This, in turn, will enable borrowers to view accurate, side-by-side home loan comparisons, Mortgage Coach and Sales Boomerang had said in November. 

Source: housingwire.com

Apache is functioning normally

With mass student loan forgiveness blocked by the Supreme Court, you may be curious about what other forgiveness or deferment options are available for students with federal — or private — student loans.

Federal loans do allow you to stop or reduce your payments in some circumstances, such as financial hardship, for up to three years — which is known as deferment. Deferment on private student loans varies by lender, and not all lenders offer it.

One thing you generally don’t want to do — simply stop making payments on your student loan. Whether your loans are federal or private, this puts you at risk of default, which can have a number of negative consequences.

Read on to learn more about student loan deferment, including what it is, how it works, its pros and cons, plus some alternative ways to get student debt relief.

Student loan deferment allows qualified applicants to reduce or stop making payments on their loans for up to three years. If you have a subsidized federal loan, no interest accrues during the deferment period. If you have an unsubsidized federal loan, interest will accrue and will be added to the loan amount (or capitalized) at the end of the deferment period.

Deferments are available on federal loans including Direct Loans, FFEL Program loans, and Perkins Loans.

Private student loans may or may not offer deferment options to borrowers. If you have questions about your private student loan, you’ll want to check in with your lender directly.

If you have a federal student loan and are no longer in school at least half-time, you will need to apply to defer payments on your student loan. This usually involves submitting a request to your student loan servicer. You will also likely need to provide documentation to show that you meet the eligibility requirements for the deferment (more on eligibility requirements below).

If you have an unsubsidized federal student loan and are granted deferment, interest will continue to accrue during the deferral period. You will have the option to either pay the interest as it accrues or allow it to accrue and be capitalized (added to your loan principal balance) at the end of the deferment period.

Deferments are available on federal loans including Direct Loans, FFEL Program loans, and Perkins Loans.

If a private lender offers deferment, they will likely have their own forms and requirements.

Applying for deferment may make sense if you are facing short-term difficulty paying your student loans, since a deferment can provide you with the opportunity you need to stay afloat financially. And, if you have a subsidized loan, deferment won’t make your loan any more expensive in the long run.

If you’re able to stay on top of your loan payments, then deferment likely doesn’t make sense. If you think that you may have long-term difficulty making your monthly loan payments, deferment may not be the best option either.

If you have an unsubsidized federal loan, interest will continue to accrue during deferment. At the end of the deferment period, this interest will be capitalized on the existing loan amount (or the principal loan value). Moving forward, interest will be calculated based on this new total. So essentially, you are accruing interest on top of interest, which can significantly increase the amount of interest owed over the life of the loan.

Pros and Cons of Student Loan Deferment

Student loan deferment can help borrowers who are struggling financially, but it may not be the right choice for everyone. Here are some pros and cons to consider when evaluating deferment options for federal student loans.

Pros Cons
Borrowers are able to temporarily suspend or lower the monthly payments on their student loans. On most federal student loans, interest continues to accrue. This may significantly increase the total cost of borrowing over the life of the loan.
Borrowers may qualify for deferment for periods of up to three years. Because interest may continue to accrue during deferment, other options like income-driven repayment plans, may be more cost- effective in the long term.

Types of Student Loan Deferment

For federal student loans, there are a few different deferment options . Here are the details on some of the most common reasons borrowers apply for deferment.

In-School Deferment

Students who are enrolled at least half-time in an eligible college or career program may qualify for an in-school deferment. If you are enrolled in a qualifying program at an eligible school, this type of deferment is generally automatic. If you find the automatic in-school deferment doesn’t kick in when you are enrolled at least half-time in an eligible school, you can file an in-school deferment request form .

Unemployment Deferment

Those currently receiving unemployment benefits, or who are actively seeking and unable to find full-time work, may be able to qualify for unemployment deferment. Borrowers can receive this deferment for up to three years.

Economic Hardship Deferment

This type of deferment may be an option for those borrowers who are receiving merit-tested benefits like welfare, who work full time but earn less than 150% of the poverty guidelines for your state of residence and family size, or who are serving in the Peace Corps.

Economic hardship deferments may be awarded for a period of up to three years.

Military Deferment

Members of the U.S. military who are serving active duty may qualify for a military service deferment. After a period of active duty service, there is a grace period in which borrowers may also qualify for federal student loan deferment.

Cancer Treatment Deferment

Individuals who are undergoing treatment for cancer may qualify for deferment. There is also a grace period of six months following the end of treatment.

Other Types of Deferment

There are other situations and circumstances in which borrowers might be able to apply for deferment. Some of these include starting a graduate fellowship program, entering a rehabilitation program, or being a parent borrower with a Parent PLUS Loan whose child is enrolled in school at least half-time.

Consequences of Defaulting on Federal Student Loans

If you simply stop making payments as outlined in your loan’s contract, you risk defaulting on your student loan. Default timelines vary for different types of student loans.

Most federal student loans enter default when payments are roughly nine months, or 270 days, past due. Federal Perkins loans can default immediately if you don’t make any scheduled payment by its due date.

•   Immediately owing the entire balance of the loan

•   Losing eligibility for forbearance, deferment, or federal repayment plans

•   Losing eligibility for federal student aid

•   Damage to your credit score, inhibiting your ability to qualify for a car or home loan or credit cards in the future

•   Withholding of federal benefits and tax refunds

•   Garnishing of wages

•   The loan holder taking you to court

•   Inability to sell or purchase assets such as real estate

•   Withholding of your academic transcript until loans are repaid

Consequences of Defaulting on Private Student Loans

The consequences for defaulting on private student loans will vary by lender but could include repercussions similar to federal student loans, and more, including:

•   Seeking repayment from the cosigners of the loan (if there are any cosigners)

•   Calls, letters, and notifications from debt collectors

•   Additional collection charges on the balance of the loan

•   Legal action from the lender, such as suing the borrower or their cosigner

To avoid these negative consequences, one option for borrowers struggling to pay federal student loans is deferment.

Who Is Eligible for Student Loan Deferment?

To be granted a deferment on federal loans, borrowers need to meet certain criteria.

You may be eligible if you’re:

•   Enrolled at least part-time in college, graduate school, or a professional school

•   Unable to find a full-time job or are experiencing economic hardship

•   On active military duty serving in relation to war, military operation, or response to a national emergency

•   In the 13-month period following active duty

•   Enrolled in the Peace Corps

•   Taking part in a graduate fellowship program

•   Experiencing a medical hardship

•   Enrolled in an approved rehabilitation program for the disabled

Borrowers who re-enroll in college or career school part-time may find that their federal student loans automatically go into in-school deferment with a notification from their student loan provider.

Loans may also keep accruing interest during deferment — depending on what kind of federal student loans the borrower holds. Borrowers are still responsible for paying interest if they have a:

•   Direct Unsubsidized (Stafford) Loan

•   Direct PLUS Loan

If you don’t pay the interest during the deferment period, the accrued amount is added to your loan principal, which increases what you owe in the end.

Recommended: Student Loan Deferment in Grad School

What if You Have Private Student Loans?

Private lenders aren’t required to offer deferment options, but some do. For example, some might allow you to temporarily stop making payments if you:

•   Lose your job

•   Experience financial hardship

•   Go back to school

•   Have been accepted into an internship, clerkship, fellowship, or residency program

•   Face high medical expenses

Typically, even while a private student loan is in deferment, the balance will still accrue interest. This means that in the long term, the borrower will pay a larger balance overall, even after the respite of deferment.

In most cases, even with accrual of interest, deferment is preferable to defaulting. Borrowers with private loans could contact the lender to ask what options are available.

The Limits of Student Loan Deferment

Keep in mind that deferment is not a panacea. By definition, it’s temporary. Federal student loan borrowers will ultimately need to go back to making payments once they are no longer deferment-eligible. For example, a borrower’s deferral might end if they leave school, even if their ability to pay has not improved.

Federal loans can only be deferred due to unemployment or financial hardship for up to three years. With private loans, there may not be an option to defer at all, and if it is an option, the limit may be no more than a year.

Other Options for Reducing Federal Student Loan Payments

Besides student loan deferment, you have other choices if you can’t afford the total cost of your monthly payments. Here’s a look at some alternatives to deferment.

Income-Driven Repayments

For a longer-term solution, you may want to consider signing up for an income-driven repayment plan.

If you qualify, you may be able to reduce your monthly payment based on your income. Enrolling in an income-driven repayment plan won’t have a negative impact on your credit score or history. On certain income-driven repayment plans, student loan balances can be forgiven after 20 or 25 years, depending on the payment plan that the borrower is eligible for.

With an income-driven repayment plan, your monthly payment is based on your total discretionary income. That means if you change jobs, or see a significant increase in your paycheck, you’ll be expected to pay a higher monthly bill on your student loan payment.

Forbearance

Student loan forbearance is another way to suspend or lower your student loan payments temporarily during times of financial stress, typically for up to 12 months. Generally, forbearance is not as desirable as deferment, since you will be responsible for accrued interest when the forbearance period is over no matter what type of federal loan you have.

When comparing deferment vs. forbearance, you’ll want to keep in mind that there are two types of forbearance for federal student loan holders: general and mandatory.

General student loan forbearance is sometimes called discretionary forbearance. That means the servicer decides whether or not to grant your request. People can apply for general forbearance if they’re experiencing:

•   Financial problems

•   Medical expenses

•   Employment changes

General forbearance is only available for certain student loan programs, and is only granted for up to 12 months at a time. At that point, you are able to reapply for forbearance if you’re still experiencing difficulty. General forbearance is available for:

•   Direct Loans

•   Federal Family Education Loan (FFEL) Program loans

•   Perkins Loans

Mandatory forbearance means your servicer is required to grant it under certain circumstances. Reasons for mandatory forbearance include:

•   Serving in a medical residency or dental internship

•   The total you owe each month on your student loan is 20% or more of your gross income

•   You’re working in a position for AmeriCorps

•   You’re a teacher that qualifies for teacher student loan forgiveness

•   You’re a National Guard member but don’t qualify for deferment

Similar to general forbearance, mandatory forbearance is granted for up to 12 month periods, and you can reapply after that time.

Another Option to Consider: Refinancing

Depending on your personal financial circumstances, another long-term solution could be student loan refinancing. This involves applying for a new loan with a private lender and using it to pay off your current student loans. Qualifying borrowers may be able to secure a lower interest rate or the option to lengthen their loan’s term and reduce monthly payments. Note that lengthening the repayment period may lower monthly payments but will generally result in paying more interest over the life of the loan.

Refinancing could be a good option for borrowers with strong credit and a solid income, among other factors. Unlike an income-driven repayment plan, your monthly payment wouldn’t change based on your income. If you aren’t able to qualify for student loan refinancing on your own, you may be able to apply for refinancing with a cosigner.

Either way, you’ll want to keep in mind that refinancing federal student loans with a private lender means you no longer have access to any federal borrower protections or payment plans. So, if you are taking advantage of things like income-driven payment plans or deferment, you likely don’t want to refinance. But for other borrowers, student loan refinancing might be a useful solution.

If you have more than one student loan, refinancing could also simplify your repayment process.

The Takeaway

If you take out a federal student loan and at some point need to pause or reduce your payments, you may be able to qualify for deferment, forbearance, or an income-driven repayment plan. Each option has its pros and cons.

If you’re considering a private student loan (or refinancing your federal loans), keep in mind that private loans don’t come with government-sponsored protections like forbearance and deferment don’t apply. However, private lenders may offer hardship and deferment programs of their own.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Deferment FAQ

How long can you defer student loans for?

Depending on the type of deferment you are enrolled in, federal loans can be deferred for up to three years. Private student loans may not offer an option to defer payments, and if they do, the limit will be set by the individual lender.

Why would you defer student loans?

Deferment can be helpful if you are facing a temporary financial hurdle, because they allow you to pause or reduce your payments for a period of time.

Are there any reasons not to defer student loans?

Most loans will continue to accrue interest during periods of deferment. When the deferment is over, this accrued interest is then capitalized on the loan. This means it’s added to the existing value of the loan. Moving forward, interest is charged based on this new total. This can significantly impact the total amount of interest that a borrower has to pay over the life of a loan.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Source: sofi.com

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Real estate is local. We hear that constantly, despite being force-fed national housing statistics all the time.  But both serve a unique purpose to give us clues about the direction of the overall economy, or just our local housing market.

A new analysis from Trulia broke down time on market by low-price tier, mid-price tier, and high-price tier.

Nationally, they found that homes in the low-price cohort are moving faster than both the mid-price and high-price tiers, which is pretty standard.  It’s typically harder to sell an expensive home (fewer eligible buyers).

Overall, 55% of homes listed for sale in mid-February were still on the market, generally a bad sign for the home seller who likely faces a price reduction. Still, that’s down from 56% a year ago.

In the low-price tier, only 49% of homes listed for sale two months ago were still on the market, down from 52% a year earlier.

That compares to 62% in the high-price tier, down just one percent from 63% a year ago.

Put another way, the sale of lower priced homes is accelerating while higher-priced home sales are slowing.

Where Homes Are Selling the Fastest

1. Oakland
2. San Jose
3. San Francisco
4. Denver
5. San Diego
6. Seattle
7. Los Angeles
8. Orange County
9. Sacramento
10. Middlesex County

These are your hot markets at the moment. For the record, none of them are cheap, which kind of bucks the national trend of cheaper homes selling faster, though there are probably fewer listings.

Oakland has been the hottest metro, with just 29% of homes still for sale after being listed for at least two months. That number is down from 31% a year ago.

The biggest year-over-year winner has been Denver, where only 38% of homes were still on the market after at least two months, compared to 47% a year ago.

Interestingly, Denver is hitting new all-time highs in the home price department, which makes you wonder if it’s getting bubbly at high altitude.

Despite Orange County, California making the top 10 list, home sales are actually slowing there, with 45% still on the market after at least two months, compared to 38% a year ago. The same trend is visible in Los Angeles.

Home prices aren’t cheap, which might explain some of the slowdown. They may have also overcorrected.

Where Homes Are Selling the Slowest

1. Richmond, VA
2. Hartford, CT
3. Albany, NY
4. New Haven, CT
5. Long Island, NY
6. Knoxville, TN
7. Springfield MA
8. Columbia, SC
9. Birmingham, AL
10. Greenville, SC

The slowest housing market in mid-April was Richmond, Virginia, where a whopping 72% of homes listed at least two months earlier still hadn’t sold.

That’s up 11% from the 61% share a year earlier. It was followed by Hartford with a 71% share, and Albany, New Haven, and Long Island all at 70%.  Perhaps the weather could be to blame…

Interestingly, faster moving markets have had bigger price increases, which seems somewhat counterintuitive.

But the rationale is that these hot markets are able to increase asking prices steadily because demand is so strong. And that demand means fewer homes stay on the market, further allowing for price increases.

Of course, there are limits, and those have been tested in fringy spots like Phoenix and the Inland Empire of California.

Source: thetruthaboutmortgage.com

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For months, experts have been sounding the alarm about how Americans who took out mortgages when rates were low are reluctant to sell and borrow now that they’ve skyrocketed.

New research, however, has found there is a magic number that makes homeowners more motivated to move.

A June survey of 1,815 homeowners from real estate listing site Zillow found that homeowners with mortgage rates 5% or higher were significantly more likely than those with lower rates to say they plan to sell. As home listings tick down amid today’s elevated rates, the findings suggest that supply could increase again in the coming years.

What the data says

Homeowners with mortgage rates 5% and up were twice as likely to say they plan to sell their homes in the next three years than those with rates under 5%. Among homeowners who said they have plans to sell, almost half paying mortgage rates above 5% said they already have their house listed for sale. (Only 20% of homeowners paying rates below 5% said the same.)

For perspective, about 80% of mortgage borrowers said their current rate is below 5%, and 90% have a rate under 6%. Nearly a third said their rate was less than 3%.

Of homeowners with higher mortgage rates who said they were thinking about selling, 65% said rates were an influencing factor. About 35% of lower-rate homeowners said the same.

Keep in mind, though, that factors other than mortgage rates can play a role in a homeowner’s choice. The survey found that fewer than half (42%) of all homeowners thinking about selling said that mortgage rate fluctuations were a reason they decided to move.

What it means

Mortgage rates are hovering around 7% at the moment, and most homeowners would have to take out new mortgages at a higher rate if they were to move. According to Zillow, the ordinary monthly mortgage payment is now twice what it was in 2020, when rates were at historic lows.

Homeowners who took out mortgages when rates were lower could pay hundreds more a month if they take out a new mortgage right now. It’s no surprise that, as a result, homeowners are reluctant to move and locked into their current rates.

Mortgage rate locks push home prices up and listings down, creating a challenging market for buyers. Zillow’s June housing market report found that there were 28% fewer new for-sale listings compared to the same time last year.

Home values have climbed in all the 50 largest metropolitan areas, bringing the typical U.S. home price to more than $350,000. Another recent report from real estate listing site Redfin found that homebuyers have lost $60,000 in purchasing power in the last year. Mortgage rates are so high that “many homeowners will move only for major life events, like a new baby or retirement,” Orphe Divounguy, a senior economist at Zillow Home Loans, said in a news release.

Despite the difficult circumstances, Zillow says its analysis offers hope that more homes could hit the market in the next few years as homeowners accept higher rates as the new norm. About 23% of homeowners surveyed said they were thinking about selling in the next three years or already have their home listed. Among homeowners with a mortgage rate above 5%, 38% said they would consider selling their home in the next three years.

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Getting creative

Additional research from Zillow Home Loans also found that buyers are finding creative ways to cope with high mortgage rates.

A separate survey released in April found that 45% of all buyers are purchasing mortgage points — which allow buyers to pay a fee to buy down the interest rate on a loan — to lower their interest rate. They’re also opting for smaller, cheaper homes and keeping an open mind when it comes to their wish lists.

More from Money:

Foreclosures Are on the Rise in These 10 U.S. Cities

Housing Market Forecast: Will Home Prices Drop in 2023?

Property Values Might Fall Soon — Here’s What Homeowners Can Do to Prepare

Source: money.com

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Independent mortgage banks (IMB) reported an average net loss of $534 on each loan originated from April to June, down from $1,972 per loan in the first quarter of 2023, according to the Mortgage Bankers Association (MBA). The average pre-tax production loss was 18 basis points in Q2. 

Including both the production and servicing business lines, 58% of retail mortgage companies were profitable in Q2, up from 32% in the first quarter of 2023.

“There were signs of improvement in the second quarter of 2023. Production losses were less severe than the previous two quarters and net servicing financial income was strong,” Marina Walsh, the MBA’s vice president of industry analysis, said in a statement. “Additionally, the majority of mortgage companies in our survey managed to squeeze out an overall profit during one of the toughest times for the mortgage industry.”

The average production volume was $502 million per IMB in the second quarter, up from $398 million per company in the first quarter of 2023. The volume by count per IMB averaged 1,553 loans in Q2, an increase from 1,264 loans in Q1.  

However, production revenue was 328 bps in the second quarter, down from 358 bps in the previous quarter. It includes fee income, net secondary marketing income and warehouse spread. 

Meanwhile, according to Walsh, after 11 consecutive quarters of increases, origination costs declined by over $2,000 per loan during the second quarter of 2023. 

“Volume picked up during the spring homebuying season and additional personnel were shed. However, the substantial cost savings per loan was not enough to put the average net production income in the black,” Walsh said. 

Loan production expenses averaged $11,044 per loan in the second quarter of 2023, down from a study-high of $13,171 per loan in Q1. The average number of production employees per company also declined to 366 between April and June from 372 in the previous quarter. 

Servicing operating income — which excludes MSR amortization, gains or loss in the valuation of servicing rights net of hedging gains or losses, and gains or losses on the bulk sale of MSRs — was $105 per loan in the second quarter, up from the previous quarter’s $102. 

The sale of MSRs does not directly impact earnings as a revenue stream, but the conversion of MSRs into cash via sales deals bolsters a lender’s cash flow and overall liquidity.

The MBA expects mortgage origination volume for one- to four-family homes to post $468 billion in Q3, a rise from $463 billion in Q2 2023, according to its latest forecast.

The MBA also projected the 30-year fixed mortgage rate to trend up to an average of 6.6% in the second quarter, ultimately declining to 5.9% by the fourth quarter of 2023.

Source: housingwire.com

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  Paul: [00:00:08]  Hello, everyone, and welcome to the latest edition of NPA TV, one in which we are shining the spotlight on the Non-QM landscape. And it’s been quite the year for the mortgage industry at large. Of course, after a relative feast over the last couple of years, it’s been fanning for some … [Read more…]

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Pricing, Internal Audit, CRM, Home Insurance, Lead Generation Tools; Comp Survey; MBA’s Cost Per Loan Stats

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Pricing, Internal Audit, CRM, Home Insurance, Lead Generation Tools; Comp Survey; MBA’s Cost Per Loan Stats

By:
Rob Chrisman

Fri, Aug 18 2023, 10:49 AM

As numbers approaching a thousand head to Orange County, CA, for the California MBA’s Western Secondary, keeping an eye on the remnants of a hurricane, it is not an easy lending environment with mortgage rates at 20-year highs, firmly in the 7’s. Thomas Edison believed, “Vision without execution is hallucination.” Many owners of lenders and vendors had very good vision and execution some years ago when creating their companies. But thinking that 2020 and 2021 would continue indefinitely would have been classified as a hallucination, and obviously things have become much more difficult with many wondering where things go from here. I don’t have a crystal ball, but a certain percentage of those owners who deferred being serious about exploring a sale, waiting, until after the cycle was obviously on the downside, they’ve perhaps undermined an opportunity for negotiating more favorable deal terms. It can be argued that the smarter entrepreneurs engaged in company sale negotiations while industry mindset is mostly driven by prosperity. (Today’s podcast can be found here and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services to the mortgage industry for almost four decades.)

Lender and Broker Software and Services

“No time for social media marketing? Introducing… Social Media Marketing for Busy Loan Officers. Tired of stressing over what to post on Facebook or LinkedIn? Want to grow your audience on Instagram without spending hours each week crafting the perfect post? With Be Loangendary, we do all of it for you. Here’s how: 1) Our team of mortgage copywriters and designers craft your social posts every week. 2) Once they’re perfect, we schedule and post to your social accounts. 3) You sit back, relax, and watch the “likes” start rolling in. With Be Loangendary, you get engaging mortgage content without breaking a sweat. That’s social media done for you. Want to get started? Enjoy a 14-day free trial on us!”

“Salesforce is committed to partnering with mortgage lenders to drive their technology transformation with modern solutions that are already in practice and serving many of the top mortgage lenders in the country. As part of its efforts to drive the industry forward through the adoption of a modern tech stack, Salesforce identified UMortgage to establish the precedent of utilizing its mortgage and lending software to its fullest potential to facilitate better client experiences. Using customized task management systems and automations within Salesforce, UMortgage has been able to achieve 300% year-over-year growth and near-perfect 95 net promoter score (NPS), an indicator of a best-in-class client experience. Check out the following link to learn more about the innovative technological systems that are helping UMortgage Loan Originators maximize their lead generation & conversion. With an investment in intuitive solutions, UMortgage is driving the mortgage industry towards a better future that enables brokers to thrive.”

We’re hearing that lenders are ramping up their tech stacks and (most importantly) focusing on the quality of the data powering that technology. If you’re considering taking your company’s tech stack to the next level, look for a property data provider that delivers the most comprehensive data through the best channels to meet your unique business needs. That’s why we’re highlighting First American Data & Analytics and its repository of more than 8+ billion recorded documents. First American is more than just a data provider. It offers end-to-end solutions for the mortgage lifecycle. From detecting fraud and risk to providing valuation solutions, First American powers lenders to make informed, data-driven decisions. If you’re ready to have access to the most accurate, complete, and current data, reach out to the team and get a data sample now.

“Lenders, the home insurance market is facing unprecedented volatility. We want to hear if it’s affecting your business and the closing process. Take our five-minute survey to share your thoughts. As a thank you, you can select to be entered to win a $100 Amazon gift card, compliments of Matic Insurance. Click here to begin the survey. Matic is a home insurance marketplace built for the mortgage industry. Learn how mortgage enterprises can implement a new revenue stream that helps borrowers navigate the insurance buying process. Book a demo today.

Wholesale lending is undergoing a transformation that will leave those who cling to outdated processes behind. Using bargain CRMs as electronic phone books or even worse, spreadsheets to track brokers, is a clear sign that your sales process is holding you back. Modern CRM technology like OptifiNow provides a comprehensive, out-of-the-box solution that helps wholesale lenders create a sales and marketing process that drives broker engagement and significantly increases loan volume. Download our guide to finding the right CRM for wholesale lenders to learn how to transform your wholesale business and stay ahead of the competition!

What’s an internal audit anyway and do you need one? An internal audit acts as a third line of defense for your mortgage operation. It provides comprehensive assurance based on the highest level of independence and objectivity to evaluate the effectiveness of management’s internal controls. This function should advise your mortgage operation on plans to achieve the company’s strategic, operational, financial and compliance goals. An effective internal audit should go far beyond just checking a compliance box; it should be an integral part of protecting your company. If you want to ensure you’re adhering to regulatory requirements and demonstrating good faith business practices, a Richey May internal audit is a good fit. If you’re looking to be Fannie Mae approved in the future or want to maintain your approved status, it’s required. If you’re unsure whether you need an internal audit, ask one of Richey May’s experts today or learn more here.

Pricing Products and Programs

“Lender Price introduces Composable Pricing UI, an innovative user interface that empowers lenders to effortlessly customize their pricing engine using No Code or Low Code options. With a variety of skinning options and increased flexibility, Lender Price users can now easily create a personalized pricing experience with an abundance of options to choose from. Surpassing the limitations of single UI platforms seen with competitors, the era of rigid, one-size-fits-all PPE’s is over. With a flexible pricing engine like Lender Price, users now have the ability to tailor their interface based on their individual needs and preferences. Composable UI represents a paradigm shift in digital lending technology UX, liberating both individuals and organizations from the constraints of single UI platforms,” said Dawar Alimi, Lender Price CEO. “With an abundance of options and unparalleled flexibility, users can personalize and take charge of their pricing experience.” Email us or request a demo today.”

In this market, hustle is everything. You can’t afford to waste a single deal or a single minute. That’s why ReadyPrice has launched its innovative new Shop, Lock & Deliver loan exchange platform, designed to help independent mortgage brokers like you save time and money. Now you can shop competitive loan offerings from multiple lenders, get rate lock guarantees in real time, receive underwriting findings, and deliver the borrower’s complete loan file to lenders and all on a single platform, at no cost to brokers. It’s the industry’s most powerful universal delivery portal, and it’s already helping brokers around the country thrive and compete in even the toughest market environments. Multiple lenders. One platform. Zero b.s. Check ReadyPrice out today.

STRATMOR Comp Information and Survey

Yesterday I published, “What do underwriters and processors and LOs make? STRATMOR has the information, spelled out in a recent Perspectives piece.” Several wrote to say that there is a wide disparity in pay based on experience, at every level, and that averages may not be telling the whole story. Point well taken, although the drop in volume/units has not been matched by the drop in personnel. Stay tuned…

Information is critical in making payroll decisions. STRATMOR Group’s Compensation Connection® Study provides valuable insight into compensation components, incentive plan structures, role specifics and more, aggregated by company type, annual volume, and region. Prior three-year trending is also included on most metrics. Get the compensation data you need: sign up for the Fall 2023 Compensation Connection® Study today!

Lenders can Relive the 2nd Quarter of 2023

Spoiler alert: Losses continue but at a slower pace. The MBA has crunched the numbers of those surveyed and calculated that independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a pre-tax net loss of $534 on each loan they originated in the second quarter of 2023, an improvement from the reported loss of $1,972 per loan in the first quarter of 2023.

Marina Walsh, CMB, MBA’s Vice President of Industry Analysis and overall good person, summed up the Quarterly Mortgage Bankers Performance Report. “After 11 consecutive quarters of increases, origination costs declined by over $2,000 per loan. Volume picked up during the spring homebuying season and additional personnel were shed. However, the substantial cost savings per loan was not enough to put the average net production income in the black… Production losses were less severe than the previous two quarters and net servicing financial income was strong. Additionally, most mortgage companies in our survey managed to squeeze out an overall profit during one of the toughest times for the mortgage industry.”

Once again, servicing income helped big time. Think about that as companies sell it off. When the MBA looked at both production and servicing, 58 percent of companies were profitable last quarter, an improvement from 32 percent in the first quarter of 2023 and 25 percent in the fourth quarter of 2022. Still, the average pre-tax production loss was 18 basis points (bps) in the second quarter of 2023, compared to an average net production loss of 68 bps in the first quarter of 2023, and down from a loss of 5 basis points one year ago. The average quarterly pre-tax production profit, from the third quarter of 2008 to the most recent quarter, is 47 basis points.

“Total production revenue (fee income, net secondary marketing income and warehouse spread) decreased to 328 bps in the second quarter, down from 358 bps in the first quarter. On a per-loan basis, production revenues decreased to $10,510 per loan in the second quarter, down from $11,199 per loan in the first quarter.

“The purchase share of total originations, by dollar volume, increased to a study high of 89 percent in the second quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 80 percent in the second quarter, with the average loan balance for first mortgages increasing to $343,386 in the second quarter, up from $329,159 in the first quarter.

It ain’t cheap to do a loan. “Total loan production expenses (commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations) decreased to $11,044 per loan in the second quarter, down from a study-high $13,171 per loan in the first quarter of 2023. From the third quarter of 2008 to last quarter, loan production expenses have averaged $7,236 per loan.

“Servicing net financial income for the second quarter (without annualizing) was $94 per loan, up from $54 per loan in the first quarter. Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses, and gains/losses on the bulk sale of MSRs, was $105 per loan in the second quarter, up from $102 per loan in the first quarter.”

For all the stats, there are five Mortgage Bankers Performance Report publications per year: four quarterly reports and one annual report. Contact Falen Taylor (202-557-2771). The reports can also be purchased on the MBA’s website.

Capital Markets

At this point it can be argued that the Fed doesn’t want to see higher long-term rates. But bond yields continue to rise across the board, impacting mortgage rates of course, continuing an upswing that began nearly three months ago at the beginning of the summer. In fact, the yield on the benchmark 10-year Treasury (US10Y) closed at 4.25% on Wednesday, the highest level since 2008. The upward march this week follows the release of the latest Federal Open Market Committee minutes, which stressed that additional interest rate hikes might be needed.

“With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy… Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening... and emphasized the importance of communicating as clearly as possible about the Committee’s data-dependent approach to policy and its firm commitment to bring inflation down to its 2% objective.”

Stronger-than-expected economic data continues to pour in, helping stock market prices, especially if you think the Fed to end its hiking cycle soon. Others say 10-year yields above 4 percent still present a good buying opportunity, in contrast to the potential rewards from pricey stocks and multiples that might not be as appealing. But it seems that bond investors have shifted to a “higher-for-longer” narrative coming out of the Fed, causing nominal rates and real rates to keep moving higher. Not good for housing affordability.

Strong economic data continued yesterday with initial jobless claims -11k and Philly Fed beating expectations by 22 points. That helped to lift benchmark 10-year U.S. Treasury yields above 4.30 percent as MBS once again sold off across the coupon stack. The recent surge in U.S. mortgage rates to anywhere between 10-month and two-decade highs, depending on who you ask, has pushed housing affordability to the lowest level in nearly four decades. Yesterday also brought another troubling sign for the Chinese economy as Beijing authorities are said to have told state-owned banks to step up intervention in the currency market in a push to prevent a surge in yuan volatility.

With no major data releases or Fedspeak today, the market will be left to its own devices. We begin the day with Agency MBS prices better from Thursday afternoon by .250, the 10-year yielding 4.22 after closing yesterday at 4.31 percent, and the 2-year at 4.91: yield curve inversion is alive and well without a recession.

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Source: mortgagenewsdaily.com