Short-term market swings are nothing new but the kind of volatility mortgage lenders are dealing with today is driven less by predictable economic indicators and more by geopolitical tensions, trade policy shifts, and global headlines.
While volatility has ticked up, it's not at historic extremes. The CBOE Volatility Index, which measures stress in financial markets, is considered high when it's above 20, and it's averaged around 27.5 recently. That's worse than the dotcom bust's 25.6, but less than the pandemic's 29.3 or the Great Financial Crisis' 32.7, according to a recent Richardson Wealth's report on the U.S. VIX.
With this in mind, we asked mortgage professionals who've been through cycles how to survive — and potentially even thrive — when managing different types of
Actively manage impact of interest rates on loan pipelines
"There's always news that causes bond traders to speculate on interest rate direction and that causes the volatility that you have to protect yourself from in any market. So you need to make sure you're hedging," said Mike Fontaine, chief operating officer at Plaza Home Mortgage.
Traditional management of risk around rate changes between rate lock and loan sale is done through the to-be-announced mortgage-backed securities market but this can also be supplemented with other financial instruments like options, he said in an interview.
"We measure and monitor loss at all at various stages of the pipeline, and we simply do not allow loan officers to gamble with borrowers' affordability," Joe Panebianco, CEO at AnnieMac, said in a separate interview.
While interest rate drivers are unpredictable this year, the amount of variation based on weekly averages is less than a percentage point. That contrasts 2022, when monetary policy was more actively and somewhat more predictably causing a far larger fluctuation in rates.
That suggests lenders may not have to panic this year, but they do need to stay on their guard.
"We're relatively calm but it feels like there's a lot of uncertainty. Even in this relatively calm time, rates can move a lot," Les Parker, partner at Transformational Mortgage Solutions, during a hedging panel at the Mortgage Bankers Association's recent secondary market conference.
Track what's moving the markets
The difficulty in today's market is that short-term volatility stems less from consistent economic trends and more from the fluid nature of global trade talks, Fontaine said.
"The world operates on a macroeconomic level, it trades intraday on a technical level, so you have to know and respect those levels," Panebianco added, noting that in the past he's found it helpful throughout his career to monitor both.
This occurred during United Kingdom Prime Minister Liz Truss' short tenure, when she sought to finance large tax cuts with government borrowing, upsetting UK pension funds that invest in public debt.
Whatever the source of short-term bond market disruption, Panebianco said he's learned to keep an eye on it.
"It's data and you need to take that data in to understand the market," he said. "I used to get up in the middle of the night and look at the Asian markets and interest rates, and now I get up and I look at Truth Social."
Diversify in the secondary market
History has shown that secondary markets for private loans are particularly susceptible to disruption in times of stress like the pandemic.
"Somebody who could offer a competitive price today might not tomorrow," Fontaine said.
To manage this risk, it's advisable to have multiple loan buyers and warehouse line providers for certain products like nonqualified mortgages. Any mortgage company that sells to aggregators may want to make sure their counterparties do also.
"For the non-QM and the jumbo markets you want to make sure you have more than one outlet," he said. "It's wise to have multiple takeout outlets for any product that's important, that's a part of what you do to manage volatility."
Lenders also should think hard about whether they want to get a higher price for taking on rate risk or not in secondary market transactions. The alternative is to take a lower price in return for handing the rate risk off to a counterparty.
Price volatility isn't always bad. Recent earnings have shown that some players have caught it and the right time to benefit from it. However, it's worked against others.
Prepare for MSR recapture
There are some good reasons for MSRs to be valuable in the current market despite this. The composition of outstanding loans and limited new origination opportunities give them value as a conduit to keeping new customers and new loans.
"Right now, people are pricing up MSRs significantly because they are bidding to prices that would suggest that there's recapture value as rates fall," said Cade Thompson, co-president and chief growth officer at Rocktop Technologies.
But lenders with servicing rights may need to be able to prove they can access that value.
"For the last three years, market participants have been paying very high multiples for MSRs, and if there's a rapid rate reduction, they may not have the scalability to handle that loan volume quick enough to recapture where they paid up for," Thompson said.
"I think one thing you can do as an MSR owner is be prepared for recapture," he added. "I've talked to a number of market participants that probably feel like they're not as prepared as they could or should be. So if rates drop a point, they need to be ready to take advantage of that."
Be prudent in responding to shifts in mortgage policy
Driving some of the price volatility in the mortgage market is policy, and not just around global tariffs that could impact the U.S. economy.
Uncertainty about how federal oversight through entities like the Consumer Financial Protection Bureau will change and what that means for the costs of various business operations like distressed servicing can also be a factor in compliance risk and pricing.
A lot is changing with not only the CFPB but other entities like the Federal Housing Administration and Department of Veterans Affairs.
Deregulation is generally anticipated and federal officials have been quick to announce unapproved concepts, but don't respond to anticipated guidance until its formalized, advises Donna Schmidt, managing director and owner of DLS Servicing.
"You need to keep honoring the spirit of existing rules," she said. "That's how we got through the 1980s, the 1990s and the housing crisis and that's how we'll get through it now."
