MBS spreads widened modestly this week and volatility climbed to a one-month high, though still near multi-year lows. Treasury and mortgage-backed securities remained range-bound despite global risk-off sentiment driven by concerns around AI investment, valuations, and slowing growth. With the Fed signaling that future balance-sheet expansion (to combat reserves nearing scarcity) would be aimed at market functioning rather than stimulus, much hinges on next month's FOMC meeting and its updated projections. Investors are increasingly focused on whether the Fed’s 2026 stance will tilt more dovish, though that view is becoming crowded.
Headline risk is increasingly shaping the mortgage landscape. The most dramatic development came from Washington, where the DOJ and FBI reportedly opened probes into FHFA Director Bill Pulte and other officials for allegedly targeting political adversaries, placing his relationship with President Trump under new scrutiny and injecting uncertainty into housing-finance leadership. At the same time, Trump escalated his unprecedented attempt to remove Fed Governor Lisa Cook over disputed 2021 mortgage-application documents, a move the Supreme Court temporarily blocked. The situation has broad implications: a ruling in Trump’s favor could weaken the Fed’s independence, unsettle investor confidence in monetary policy, and introduce new political volatility into mortgage-rate expectations.
On the data front, existing-home sales rose 1.2 percent in October to a 4.1-million pace as slightly lower mortgage rates and gradually improving inventory pulled some buyers back into the market. Regional trends were mixed: first-time buyers and those in high-priced coastal markets still face steep affordability barriers, but easing rents and cooling inflation help support the argument that the Fed may have room to reduce rates next year. Prepayment activity also accelerated sharply, with Fannie 30-year speeds up 32 percent and servicer behavior once again shaping the speed distribution across the UMBS stack, though overall refi incentives remain historically limited.
Labor-market data added another layer of ambiguity. The shutdown-delayed September jobs report showed a seemingly solid 119k increase in payrolls, but large downward revisions to prior months and an unemployment rate rising to 4.4 percent suggested cooling beneath the surface. Markets interpreted the data as mixed, reducing the perceived probability of a December rate cut to roughly one-third. Treasury yields fell anyway, anchored near 4.10 percent, as investors focused on sector-specific hiring (education, healthcare, hospitality, and AI-driven nonresidential construction) rather than broad economic acceleration. With liquidity thinning ahead of the holidays and major data releases still delayed, mortgage-rate volatility is likely to rise even as bonds continue their unexpectedly strong year-to-date performance.
Industry economics, meanwhile, showed cautious improvement. Independent mortgage banks earned $1,201 in pre-tax production profit per loan in Q3, up from $950 in Q2, as stronger production revenue outweighed slightly higher costs. Roughly 85 percent of firms were profitable across both production and servicing, highlighting a modest but broad-based rebound. Still, structural challenges persist: per-loan expenses hit $11,109, far above long-term averages, and mortgage applications fell 5.2 percent last week. Companies continued repositioning: PHH prepared to sell its reverse-mortgage origination assets and servicing portfolio to FAR, CrossCountry Mortgage priced a $600 million senior-notes offering to pay down MSR financing lines, and Rate relaunched a wellness-focused consumer app as lenders search for new customer-engagement angles in a cooling cycle.