Mortgage Pricing Insights JUNE 2020

CONTENT OVERVIEW

INTRODUCTION PG. 3 • MORTGAGE PRICING INSIGHTS REPORT SUMMARY 3 • MAY MARKET OBSERVATIONS 3

MORTGAGE RATES PG. 4 • MORTGAGE RATE SUMMARY 4 • MORTGAGE RATE SPREAD TO TREASURIES 4 • PRIMARY TO SECONDARY YIELD SPREAD 5 • PRIMARY MORTGAGE RATES VIA OBMMI™ 5 • MORTGAGE RATE FORECAST 6

PRIMARY MARKET PG. 7 • LOAN ORIGINATION VOLUMES 7 • ORIGINATIONS BY PRODUCT 7 • BORROWER CREDIT BY PRODUCT 8 • LENDER PIPELINE PULL-THROUGH 8 • BEST-EFFORTS VS. MANDATORY SPREAD 9 • WHOLE LOAN VS. MBS PRICING 9

SECONDARY MARKET PG. 10 • MBS NOMINAL SPREADS TO THE 10-YR. TREASURY 10 • NOMINAL SPREAD & OAS HISTORY 10 • MBS CC OAS TO SWAPS 11 • 30-YR. MBS EMPIRICAL DURATIONS 11 • EMPIRICAL VS. IMPLIED VOLATILITY 12 • CORPORATE CREDIT MARKET HIGH-YIELD SPREADS 12 • GSE CONFORMING MORTGAGE CREDIT CONDITIONS 13

SOURCES & REFERENCES PG. 14 • ABOUT OPTIMAL BLUE, LLC AND ANDREW DAVIDSON & CO., INC. 14

LEGAL DISCLAIMER PG. 15

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INTRODUCTION

MORTGAGE PRICING INSIGHTS REPORT SUMMARY

Optimal Blue and Andrew Davidson & Co., Inc. (AD&Co), a leading provider of risk analytics and consulting for residential lending and MBS, have partnered to deliver the Mortgage Pricing Insights report. Released monthly, this report leverages proprietary data and analytics produced by both firms to provide a comprehensive view into mortgage finance across the primary and secondary markets. Each robust report includes updates to critical mortgage metrics like rates, yields, volumes, and prepayments, and also highlights the most relevant trends in the mortgage industry. For access to the data and analytics displayed herein, please contact Optimal Blue and/or AD&Co through the contact information provided on page 14.

MAY MARKET OBSERVATIONS

• The financial markets continued to edge away from the precipice of the worst stress since 1929. Federally- connected mortgage markets improved in sync. Spreads moderately tightened and mortgage production and housing prices remain surprisingly healthy. However, historically wide spreads persist. Credit is tighter and non-government mortgage volume remains challenged.

• Primary and secondary mortgage markets continued to recover from the blowout in spreads to Treasury that occurred in mid-March, as a result of the economic turmoil caused by COVID-19. Treasury rates were unchanged during the month, while primary mortgage rates fell 8 bps to 3.23%. The historically wide gap between primary mortgage rates and the 10-year Treasury of 291 bps continued to manifest in mid-March (spread averaged 210 bps during Jan./Feb. ‘20) and contracted by just 9 bps in May to close at 258 bps.

• Historically low mortgage rates and loosening of COVID-19 restrictions drove originations higher in May. Total rate locks grew by 11% month over month (MoM), up nearly 75% from May 2019. Rate/term refinances showed no signs of slowing, with volumes over 3 times the prior years’ totals. Conforming loans kept a dominant share of production with nearly 75% of new rate locks; up from approx. 60% pre-pandemic.

• Due to uncertainty stemming from the Federal forbearance policy, lenders continue to tighten credit. May saw average FICO scores climb again, with the largest increases in FHA and VA loans.

• Lender pull-through rates have settled in at historical averages near 80%, providing welcomed stability to pipeline managers. Loan pricing also improved relative to MBS in May, delivering gains for originators.

• The spread from primary mortgage rates to MBS yields in the secondary market fell 21 bps during the month but remains historically high. The nominal yield spreads of MBS to Treasuries in the secondary market ticked up 13 bps to 100 bps but remain well below the recent peaks that resulted from large-scale Fed purchases. MBS OAS levels widened modestly by 8 bps.

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MORTGAGE RATES

MORTGAGE RATE SUMMARY

March 20, 2020 was chosen to highlight effects of pandemic.

Source: Optimal Blue Mortgage Market Indices™ (OBMMI ™) — optimalblue.com/obmmi AD&Co Analytics — ad-co.com

MORTGAGE RATE SPREAD TO TREASURIES

The 10-year Treasury traded in a tight 10 bps range during May and finished the month up 1 basis point at 0.65%. After opening the month at 3.31%, the 30-year conforming mortgage rate dropped 8 bps. Oscillating between 255 and 271 bps, the mortgage rate spread to Treasury finished the month at 258 bps, well above its long-term average.

5.0% 3.00% SPREAD TO TREASURY 4.5% 2.75% 4.0% Open: 267 bps 3.5% 2.50% Close: 258 bps 3.0%

2.5% 2.25% Average: 262 bps Rates 2.0% Spread 2.00% Min: 255 bps 1.5% 1.0% Max: 271 bps 1.75% 0.5% 0.0% 1.50%

Source: Optimal Blue Mortgage Market Indices™ (OBMMI™) — optimalblue.com/obmmi Spread 10-YR Treasury OBMMI 30-YR Conforming Rate U.S. Department of the Treasury — treasury.gov

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MORTGAGE RATES – Cont’d.

PRIMARY TO SECONDARY YIELD SPREAD

The mortgage rate spread to MBS remains very high, but it has tightened 33 bps from the 191-bps peak in mid-March. Originators report high profits per loan, though risk is elevated in several areas. Financing costs, hedging costs, and delivery uncertainty due to forbearance are all up; servicing values are way down, and loan-processing capacity is constrained by the pandemic.

2.0

1.9 PRIMARY SECONDARY

1.8 SPREAD 1.7 Open: 179 bps 1.6 Close: 158 bps 1.5 Average: 169 bps 1.4 Min: 158 bps Primary Secondary Secondary Primary Spread 1.3

1.2 Max: 177 bps

1.1 Source: Optimal Blue Mortgage Market Indices™ 1.0 (OBMMI™) — optimalblue.com/obmmi Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Bloomberg L.P. — bloomberg.com

PRIMARY MORTGAGE RATES VIA OBMMI™

Federally-connected mortgage rates continued to decrease in May as primary market spreads tightened slightly from decades-wide levels, while Treasury bond rates remain at 100-year lows. Jumbo rates remain elevated due to a lack of secondary market liquidity for non-agency products.

5.0%

4.5%

MONTHLY RATE AVERAGES 4.0% (MoM)

30-YR. Conf.: 3.29% (-11 bps) 3.5% MortgageRates

30-YR. Jumbo: 3.50% (-14 bps) 3.0% 30-YR. FHA: 3.36% (0 bps) 2.5% 30-YR. VA: 2.98% (-5 bps)

30-YR Conforming Rate 30-YR Jumbo Rate 30-YR FHA Rate 30-YR VA Rate

Source: Optimal Blue Mortgage Market Indices™ (OBMMI ™) — optimalblue.com/obmmi

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MORTGAGE RATES – Cont’d.

MORTGAGE RATE FORECAST

AD&Co forecasts spreads to tighten from the current wide levels. Mortgage rates will otherwise follow the path of Treasury rates; rising along the forward curve or falling based on the current curve.

RATE FORECAST (PSS) 3 months: 3.20% (155 bps) 6 months: 3.17% (152 bps) 12 months: 3.13% (148 bps)

Source: AD&Co Analytics — ad-co.com

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PRIMARY MARKET

LOAN ORIGINATION VOLUMES

Purchase rate lock volumes recovered from a slow April, growing by 34% MoM. This growth is a positive sign for the real estate market as the economy reopens. Refinance originations continue at a torrid pace as borrowers take advantage of the current rate environment and, in the case of cash- out refinances, stow money away to compensate for potential loss of income in the near future.

450 4.6% VOLUME CHANGES 400 4.4%

350 4.2% MoM, YoY 300 4.0% Purchase: +34%, +2% 250 3.8%

200 Rate C/O Refi: -12%, +55% 3.6% 150

Index Value Index R/T Refi: +4%, +341% 100 3.4% Total: +11%, +74% 50 3.2% 0 3.0%

Source: Optimal Blue Mortgage Market Indices™ (OBMMI™) — optimalblue.com/obmmi Optimal Blue Market Analytics — Purchase Cash Out Refi Rate/Term Refi OBMMI 30-YR Conforming Rate optimalblue.com/market-analytics

ORIGINATIONS BY PRODUCT

Product mix for new originations was little changed from April to May. Conforming loans maintain dominant market share as the 2020 refinance boom continues. Non-conforming product origination, primarily Jumbo loans, remain depressed due to widespread credit tightening due to the economic havoc created by the pandemic.

100% PRODUCT SHARE 90%

(MoM) 80% Conforming: 73% (-106 bps) 70% 60% Non-Conforming: 4% (+41 bps) 50%

FHA: 10% (+49 bps) 40% Product Share Product VA: 12% (-12 bps) 30% 20% USDA: 1% (+28 bps) 10%

0% Source: Optimal Blue Market Analytics — May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 optimalblue.com/market-analytics Conforming NonConforming FHA VA USDA

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PRIMARY MARKET – Cont’d.

BORROWER CREDIT BY PRODUCT

Borrower credit tightened in May, continuing the trend followed since the onset of the pandemic. Lender overlays that were meant to minimize fallout risk from forbearance risk have kept low credit score borrowers on the sidelines. With no shortage of refi volume coming from lower risk borrowers, lenders are likely to maintain these higher standards.

AVERAGE FICO (MoM) Conforming: 758 (+3) Non-Conforming: 766 (+4) FHA: 672 (+5) VA: 720 (+6) USDA: 701 (-1)

Source: Optimal Blue Market Analytics — optimalblue.com/market-analytics

LENDER PIPELINE PULL-THROUGH

Originator pull-through rates converged for purchase and refinance loans in May at a benchmark 80% level. This is another positive sign after the heavy pipeline turmoil in March, which resulted from an excess of originations and the social distancing requirements caused by the onset of COVID-19.

PULL-THROUGH (MoM) Purchase: 81% (+152 bps) Refi: 81% (-184 bps)

Source: Optimal Blue Hedge Analytics — optimalblue.com/hedge-analytics

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PRIMARY MARKET – Cont’d.

BEST-EFFORTS VS. MANDATORY SPREAD

The spreads between best-efforts and mandatory delivery narrowed in May after spiking at the onset of the COVID-19 pandemic. While this is a positive sign of stability, spreads remain elevated, a signal that significant uncertainty remains in the secondary market.

BEST-EFFORTS VS. MANDATORY SPREAD (MoM) 30-YR. Conf.: 85 bps (-11 bps) 30-YR. VA: 68 bps (-60 bps) 30-YR. FHA: 118 bps (-40 bps)

Source: Optimal Blue Hedge Analytics — optimalblue.com/hedge-analytics

WHOLE LOAN VS. MBS PRICING

Compared to MBS, investor/aggregator pricing is still deeply discounted, but it is improving particularly for government loans. Fed purchasing has driven up the price of MBS, but whole loan pricing did not follow suit, as market volatility and concerns about forbearance instigated wider margins for aggregators.

SPREAD CHANGES (MoM) Best Ex vs. UMBS: +21 bps Best Ex vs. GNMA: +243 bps Cash Window vs. UMBS: +21 bps

Spreads indexed to zero on February 3, 2020.

Source: Optimal Blue Hedge Analytics — optimalblue.com/hedge-analytics

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SECONDARY MARKET

MBS NOMINAL SPREADS TO THE 10-YR. TREASURY

Nominal MBS spread to Treasury is 100 bps, 41 bps tighter than in mid-March after the Fed began to buy MBS in size but remaining near the highs for the last seven (7) years.

MBS NOMINAL SPREAD Current: 100 bps Average since May 13: 75 bps Minimum since May 13: 57 bps Maximum since May 13: 141 bps

Source: AD&Co Analytics — ad-co.com

NOMINAL SPREAD & OAS HISTORY

Both nominal MBS spreads and OAS have tightened by 40 bps since their generational peaks observed in mid-March, remaining historically wide.

MONTHLY SPREAD AVERAGES (LAST MONTH) Nominal spread: 94 bps (112 bps) OAS: 59 bps (71 bps)

Source: AD&Co Analytics — ad-co.com

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SECONDARY MARKET – Cont’d

MBS CC OAS TO SWAPS

MBS OAS have tightened by about 40 bps since the middle of March to 61 bps but remain extremely wide over the past seven (7) years.

OAS SPREAD Current: 61 bps Average since May 13: 27 bps Minimum since May 13: 2 bps Maximum since May 13: 101 bps

Source: AD&Co Analytics — ad-co.com

30-YR. MBS EMPIRICAL DURATIONS

Mortgage rates are under 3.5% and spreads are expected to tighten if the economy stabilizes. Empirical durations, which are depicted below, show what investors are willing to pay for additional mortgage yield. Expectations are that prepayment speeds for premium mortgages will be very high. While rarely reported on market monitors, there is non-trivial production of 2.0% coupon mortgage pass-throughs.

DURATIONS FN&UMBS 2.5%: 2.9 GNII 2.5%: 3.6 FN&UMBS 3.0%: 1.4 GNII 3.0%: 1.1

Source: AD&Co Analytics — ad-co.com

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SECONDARY MARKET – Cont’d

EMPIRICAL VS. IMPLIED VOLATILITY

Empirical volatility is measured by weekly changes in a 60-day moving average for a 10-year swap rate, annualized. Implied volatility used in MBS OAS calculations has recently been well below realized volatility. The two series have been quite close to one another over the 23-year period (average: 0.90% implied, 0.92% realized). Empirical volatility has been exceptional since March; however, looking forward, implied volatility suggests the market is anticipating more stability.

CURRENT VOLATILITY Implied: 0.56 Empirical: 1.04

Source: AD&Co Analytics — ad-co.com

CORPORATE CREDIT MARKET HIGH-YIELD SPREADS

Spreads in the corporate sector widened dramatically in March and have now tightened 432 bps from the earlier 2020 highs. Mortgage rates, funding costs, and corporate credit spreads increased similarly, but have moved marginally lower over the last month.

CORPORATE HIGH-YIELD SPREADS March 20: 1087 bps May 31: 654 bps

Source: Optimal Blue Mortgage Market Indices™ (OBMMI™) — optimalblue.com/obmmi Federal Reserve Economic Data (FRED) | Federal Reserve Bank of St. Louis — fred.stlouisfed.org

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SECONDARY MARKET – Cont’d

GSE CONFORMING MORTGAGE CREDIT CONDITION

Market implied GFees are derived from CRT prices using three factors: (A) expected loss, (B) price of unexpected risk, and (C) technical spread. Recently, the largest changes in implied GFees are driven by technical spread, which has gone up multifold due to CRT forced liquidations, while the fundamental loss expectation component has increased 2-3 times. Implied GFees have trended lower since their peak in March but remain historically high.

GFEES 3M average CAS I-GFee: 57 3M STACR I-GFee: 59 3M 60-80 LTV I-GFee: 56 3M High LTV I-GFee: 59

Source: AD&Co Analytics — ad-co.com

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SOURCES & REFERENCES

ABOUT OPTIMAL BLUE

Optimal Blue’s Marketplace Platform connects the industry’s largest network of originators, investors, and providers. Nearly $2 Trillion of transactions are processed across the platform each year, facilitating a broad set of secondary market interactions like pricing, locking, hedging, and trading of mortgage loans. For more information, please visit www.optimalblue.com.

DATA CONTACT FOR OPTIMAL BLUE:

Brennan O'Connell, Data Solutions Manager [email protected]

ABOUT ANDREW DAVIDSON & CO., INC.

Andrew Davidson & Co., Inc. (AD&Co) was founded in 1992 by Andrew Davidson, an international leader in the development of financial research and analytics, mortgage-backed securities product development, valuation and hedging, housing policy and GSE reform, and credit-risk transfer transactions. Since its inception, the company has provided institutional fixed-income investors and risk managers with high quality models, applications, consulting services, research, and thought leadership, aimed at yielding advanced, quantitative solutions to asset management issues. AD&Co’s clients include some of the world's largest and most successful financial institutions and investment managers. For more information, please visit www.ad-co.com.

DATA CONTACT FOR AD&CO:

Rose Barnabic, Director of Mortgage Banking [email protected]

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LEGAL DISCLAIMER

DISCLAIMER Optimal Blue, LLC and Andrew Davidson & Co., Inc. (each a “Party” and together the “Parties”) believe this publication (the “Mortgage Pricing Insights” report) to be reliable, however its accuracy, completeness, timeliness, and suitability for any purpose are not guaranteed. All opinions are subject to change without notice. Nothing in the Mortgage Pricing Insights report constitutes: (1) Investment, legal, accounting, tax, or other professional advice; or (2) Any recommendation or solicitation to purchase, hold, sell, or otherwise deal in any investment. The Mortgage Pricing Insights report has been prepared for general informational purposes, without consideration of the circumstances or objectives of any particular investor. Any reliance on the contents of this publication is at the reader’s sole risk. Neither Party is responsible in any manner for any damages whether direct, indirect, special or consequential, howsoever caused, arising out of use of this content, or reliance on the information it contains. All investment is subject to numerous risks, known and unknown. Past performance is no guarantee of future results. For investment advice, seek a qualified investment professional. NOTE: An affiliate of Andrew Davidson & Co., Inc. engages in trading activities in securities that may be the same or similar to those discussed in this publication.

UTILIZING OUR CONTENT If linking to or referencing the Mortgage Pricing Insights report, you agree to clearly attribute the link or the reference to the Mortgage Pricing Insights report directly to Optimal Blue, LLC or Andrew Davidson & Co., Inc., dependent on from which source you have received the data. The Parties are and shall remain the exclusive owner of the Mortgage Pricing Insights report and all patent, copyright, trade secret, trademark, and other intellectual property rights therein and the Parties’ names, (including, but not limited to Optimal Blue, LLC, Andrew Davidson & Co., Inc., either Party’s logo) etc., may not be used in any advertising, publicity, promotion, or other commercial manner without our prior written consent, unless otherwise noted herein. By the Parties posting the Mortgage Pricing Insights report, it does not diminish or waive any of the Parties’ rights (including, but not limited to patents, copyrights, and trademarks) nor does it transfer any such rights to you or a third party. You agree not to delete any copyright or similar notice from any content.

TRADEMARKS All services names, product names, company names, and logos used in this report are trademarks or registered trademarks of their respective owners.

REVISIONS The Parties may amend or revise these disclosures at any time without notice.

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