MBS RECAP: Rally Reverses

Over the past three months the mortgage industry has struggled greatly to interpret and implement loan originator compensation reform and new anti-steering regs. The final rules are scheduled to go live on April 1 but the Federal Reserve still hasn't provided written guidance on the rule changes. This forced major mortgage banks and regional lenders to come up with their own policies and procedures. Unfortunately there has been no uniformity in their individual translations of the rule change. This lack of interpretative consistency has created confusion and further muddled the loan application process for consumers. As a result, several lawsuits have been filed against the Fed to delay the rule change. Both the NAIHP and NAMB filed suit to prevent the April 1st implementation. Also, a letter co-authored by Senators David Vitter from Louisiana and Jon Tester from Montana was recently sent to the Federal Reserve requesting a delay in the implementation of the Fed's loan originator compensation rules. Adding to that letter today, the House Financial Services Committee formally stated their opinion on the issue. HERE IS THE LETTER..

The Federal Reserve Open Market Committee has released the March FOMC Statement. On the whole the Fed hinted at a modest upgrade in economic conditions. Saying the information received since January "suggests" the economic recovery is on "firmer footing". The labor market also "appears" to be "improving gradually". Household spending and business investment continue to "expand". On inflation, the Board acknowledged rising food and energy prices but said it anticipates the effects to be "transitory" or temporary. Longer-term inflation expectations are stable. Although the language surrounding the upgrade indicates a hesitancy to get overly excited ("suggests" and "appear"), the tone of the statement implies the Fed is feeling more confident about the economic foundation it has built since the financial collapse in 2008. The Fed made no mention of the crisis in Japan or conflict in Northern Africa/The Middle East. The QEII bond purchasing program is expected to continue as planned before ending in June. No voters dissented the decision.

After the FOMC Statement mentioned a gradual generally improving set of economic conditions as well as "commodity prices putting upward pressure on inflation," bond markets are moving to their weakest levels of the day. The pace of the sell-off is not intense, especially considering the Announcement contained no major surprises and that the inflation concerns had a caveat of being "expected to be transitory" and that "underlying and long term inflation have remained stable/low." 10yr notes are up to 3.312 in hand with a still relatively-connected stock lever. FNCL 4.5's fell briefly to 102-05, but are since back up to 102-07. It's still too early to tell how all the data and news will ultimately be digested today, but in addition to the reprice risk noted earlier, and the fact that reprices for the worse have been seen, we'd note that risks of reprices for the worse or even additional reprices for the worse continue to be elevated unless bonds manage a rebound.

Giving the impression that the FOMC Statement at 2:15pm will carry it's normal amount of significance is misleading. It probably won't, unless they drop a big, unexpected bomb of some sort. Given all the Fed-Speak of late, we're not exactly sure what that bomb would be, but we thought an FOMC statement at least deserved that caveat. This morning's volume is an indication that the "serious trading" is already in progress and not waiting around for the FOMC for a deluge of new volume and directional cues. 10's look to be stabilizing off 3.30 highs. Stock lever very much intact. FNCL 4.5's bounced at 102-10 and sit now at 102-12. Risks of additional reprices for the worse beyond those already seen are now diminishing.

The stock lever continues to nudge benchmark yields higher with the 10yr set to test 3.30. FNCL 4.5's have fallen to their lows of the day at 102-09. Although this is still 8 ticks better on the day, it's part of a directionally weaker move that began around 10am when prices hit 102-18. That's more than enough movement for any lender pricing near that time to reprice for the worse and indeed that has already been seen. Additional lenders will likely reprice soon, and in increasing numbers on any further losses.

(Reuters) - A comprehensive settlement between U.S. authorities and banks over alleged abuses of mortgage servicing needs to be reached quickly to help the housing market heal, Treasury Secretary Timothy Geithner said on Tuesday. Geithner said such a settlement would allow the government to focus more directly on repairing the damage to the broader housing market and will help dispel the legal uncertainty plaguing mortgage lenders. "It is very important that we try to bring this to bed as quickly as we can," Geithner told the Senate Banking Committee. "I think all parties, not just the servicers, but the state AGs and the federal agencies have a strong stake in doing that." A group of 50 attorneys general and 12 federal agencies are probing bank mortgage practices that burst into public view last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day. The negotiators are struggling to reach a single agreement on financial penalties and higher standards for banks handling troubled home loans.

Rate sheet influential MBS prices are 6/32 off their intraday price highs as benchmark 10s back up on profit taking. Lenders who released loan pricing before 10am are more likely to recall rate sheets and republish for the worse. 10s are currently +23/32 at 102-28 yielding 3.285%. This is an an area of support. If stocks extend their recovery attempt and 3.28% is broken, broad-based reprices will likely be announced. This directional move is being driven by stocks which are slowly recovering from extreme overnight lows.

We talk a lot about PIVOT POINTS on this site--a certain horizontal or diagonal line on a chart that has shown a tendency either to provide support or resistance depending on whether or not the charted price or yield is approaching from above or below the line. With that in mind, and knowing that 10yr yields, as one of the most universal benchmarks for the bond market, have moved slightly higher since the stock market open, let's take a look at where 10's seem to be stopping. On a short term chart, we can see them bumping into some sort of imaginary ceiling in the high 3.27's and even up to 3.28. But if we zoom out to an intermediate term view, we can see this same horizontal line hasn't always been "a ceiling" for yields. In fact, it was rather an epic "floor" (aka, resistance) during THE RANGE days. The longer that yields stay below 3.28, the more a case builds that recent movements in yields have leapfrogged BELOW the previous limits of THE range (you know... the range that prevailed for two months that finally released energy toward much higher yields?). The fact that this is today's support level so far is by no means a prediction that it will continue to be, but rather that it will mean something if yields move higher than 3.28. FNCL 4.5's are currently up 12 ticks on the day at 102-13, but this is their lowest mark of the day. So if treasury yields break the support ceiling, it's not unlikely to see MBS break their floor at 102-13 resulting in the previously mentioned increased reprice risk.