Stocks are lower this morning as software stocks continue to get beat up. Bonds and MBS are up.
There is no obvious reason for the recent rally in bonds. It might just be a by-product of the stock market sell-off, but with credit problems in the PE space it could be a signal of something more significant. In mortgage land, any issues here will be felt first in non-QM lending.
Inflation at the wholesale level increased 0.5% MOM in January, which was above the Street 0.3% estimate. For the year 2025, final demand prices rose 2.9%. The PPI index which excludes food, energy and trade services rose 0.3% MOM and 3.4% YOY.
About 20% of the increase in services inflation was due to a 14% jump in the prices for professional and commercial equipment wholesaling. Goods inflation declined, which was mainly attributable to a drop in gasoline prices.
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Non-agency production continues its recent growth trajectory and the market is positioning for expansion. At the origination level, lenders with over $25 million of monthly non-QM production are exploring the transition from a best-efforts flow-business model, to mandatory single-loan or bulk-sales. Concurrently, larger aggregators and securitization conduits are actively seeking loans. Vendors, for their part, are supporting the sector and actively implementing services and pricing models to facilitate this evolution. The topic was extensively discussed at the recent MCT Exchange conference in San Diego. The featured session on non-QM lending included Wayne Liu of AmWest Funding, who detailed his 2025 experience and the success of the AmWest non-QM program. Wayne explained how AmWest utilized CME Group’s Eris SOFR swap futures rather than TBAs or US Treasury futures, as hedges for their loan inventory preceding securitization. He cited SOFR futures as a key element in AmWest’s hedging strategy which was fundamental in supporting the success of the firm’s securitization program. The underlying principle is straightforward: loans are a reflection of the cost of the warehouse lines required to fund the lending. Given that this cost of funding is SOFR-based, and that a non-QM eligible TBA is not available, loan inventory and pipeline interest rate risk may be easily and effectively hedged with Eris SOFR Swap futures.
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Chicago Fed President Austan Goolsbee said that rates can come down later this year: “I have some confidence rates can come down several more times this year in 2026,” Goolsbee said in an interview on Fox News. “I just don’t want to front load it too much before we actually have the evidence that the inflation is headed” back down to the Fed’s 2% goal.
“Several” is good. Three or more rate cuts. The Fed Funds futures have a roughly 50/50 chance for a rate cut in June, and the December futures see 2 cuts as most likely this year, with 3 cuts as the next most likely.
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Mortgage performance is holding up, according to the ICE First Look. “Mortgage performance held steady to start the year, with fewer early-stage delinquencies helping bring the national delinquency rate down,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “At the same time, late-stage delinquencies and foreclosure volumes are both trending higher than they were a year ago. The data points to a market that remains resilient overall with most borrowers performing well while a subset faces increased payment pressure.” FHA is a known problem here.
That said, 90+ delinquencies and foreclosures are increasing. There are now 850k borrowers in the 90+ / active foreclosure category compared to 0nly 104k last year at this time. Fitch Rating’s DV01 data shows that DQs are picking up in non-QM lending.
