MBS RECAP: Lots of Price Volatility

4 times today the S&P index has tried to break above the bulk of Friday's trading range, and four times they've been capped by 1277--most recently in two decisive peaks that are currently sending S&Ps back toward opening levels. The late day lack of conviction in stocks is helping 10yr Treasury yields hold under 3%. 10's reached 2.997 just as stocks hit 1277 for the 2nd time, but are about 1 bp lower now at 2.991. Given that MBS have been content to follow Treasuries today, Fannie Mae 4.0's are narrowing in on the 100-24 technical level that acted as a supportive floor on Friday. Reprices for the worse warned against earlier have been reported by several lenders, but the narrowing of the MBS trading range in this after-hours sessions should decrease the risk of additional reprices though not eliminate them completely. More important than whether or not a reprice comes is whether or not it's part of a larger shift in a strategic sense, and although we think a bit of a pull back is possible in the context of a longer term rally, we're not seeing any sort of confirmation as today being a part of that. Overall, we're lining up to head out the door in the same territory as Friday.

While it's not a given that widespread reprices for the worse will be seen, there's a chance that some lenders who earlier had repriced for the better, may now reprice for the worse if MBS continue at current levels or fall further. 4.0 Fannie Mae 30yr MBS are now down 3/32nds on the day at 100-23. They were 9/32nds higher at their best today, briefly hitting 101-00 just after 1pm Eastern. Lenders who released rates or reprices between noon and 130pm have seen MBS prices fall enough to consider repricing for the worse. Lenders that released rates before 10am Eastern and who have not repriced for the better stand considerably smaller chances of doing so. Either way, reprices for the worse have now taken over as being more likely than reprices for the better, though we'd reiterate the importance of matching up the movements in the 4.0 MBS chart to the time of a given lenders initial rate release and any reprices for the better before accepting the likelihood of a reprice.

MBS commonly take directional cues from Treasuries and today is no exception. Treasury yields can also closely follow stock prices--something we refer to as "The Stock Lever"--especially on days that lack economic data or other guidance giving market events of enough importance to suggest either market marching to the beat of its own drummer. Today is a highly correlative day for the stock lever and so with stocks bouncing rather forecfully from their lows of the day (S&P up from 1266 to 1273.5 in less than an hour) Treasury yields have risen as well, ultimately pulling MBS prices down from their highs. Fannie Mae 4.0 MBS are down from 101-00 to 100-27, which is still 2/32nds improved on the day. 10yr notes have been dragged from yields around 2.95 to 2.97 currently. It's not a given that these recent trends will continue, but their onset does decrease the likelihood of reprices for the better, and if they do result in MBS losing a few more 32nds, some lenders that repriced for the better may consider repricing for the worse. That depends heavily on the lender and the timing of initial rates, and the timing and amount of any reprice for the better. Your best bet is to match up the time of initial rates and/or reprices to the chart of the 4.0 MBS to see how many more 32nds would need to be lost in order to supersede what was gained between initial rates and reprices. In general, we'd view 100-24 / 100-25 as the first major layer of downside risk.

(Reuters) - New York's top legal officer is seeking information from Deutsche Bank AG and Bank of New York Mellon about their role as trustees for mortgage-backed securities, an expansion of his probe of mortgage practices, said a person familiar with the matter. New York Attorney General Eric Schneiderman's office is examining whether the banks fulfilled their administrative duties owed to investors set out in agreements that pool mortgages into securities, according to the source. This person requested anonymity because of a lack of authorization to speak publicly about the probe. Kevin Heine, a spokesman for Bank of New York Mellon, declined to comment. John Gallagher, a spokesman for Deutsche Bank, also declined to comment. The New York Times first reported the inquiry into the role of the trustees. The newspaper also said New York's Schneiderman had teamed with Joseph Biden III, his counterpart in Delaware. (By Andrew Longstreth Editing by Steve Orlofsky)

Rate sheet influential MBS coupons are venturing into positive territory as stocks shed modest gains and benchmark Treasuries recover from early session weakness. The Fannie Mae 4.0 MBS coupon is currently bid above 100-24 technical resistance, now +2/32 at 100-27 on the day. The 10-year note is +1/32 at 101-11 yielding 2.969% after trading as high as 3.01% in early action. Based on our sampling of rate sheets from the five major lenders, these MBS appreciations are enough to warrant reprices for the better. We've actually already seen one "hair-trigger" lock desk recall rate sheets and re-issue for the better. With that in mind, if these intraday improvements hold, we'd expect to see more reprice announcements.

(Reuters)-US regulators will give banks more time to comply with a crackdown on their mortgage servicing practices. On Monday the Office of the Comptroller of the Currency said it was extending by 30 days the time the banks have to file plans for how they will meet the requirements laid out in an agreement entered into on April 13 with the agency. The banks originally had 60 days to comply with the order. The OCC said the Justice Department is requesting the delay, which would provide more time for it and state governments to advance their own negotiations with the banks to settle accusations of foreclosure shortcuts. A group of 50 state attorneys general and federal agencies have been probing bank mortgage practices that came to light last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day. The OCC, the Federal Reserve and the Office of Thrift Supervision announced on April 13 that 14 large housing lenders had agreed to overhaul their mortgage operations and compensate borrowers who were wrongly foreclosed upon. What fines the banks may have to pay has yet to be determined. The state AGs and the Justice Department are in talks with Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial about a separate settlement. Last month the banks had proposed a settlement figure of $5 billion, which was far below the $20 billion range the states and their partner federal agencies had discussed. Earlier this year the banking regulators and the states had hoped to announce a settlement with the banks at the same time but in April the banking agencies decided to move first. At the time Acting Comptroller of the Currency John Walsh said that the compliance plans banks would have to submit under their agreement with the banking agencies could include elements of whatever settlement the lenders struck with the states and the Justice Department. (Reporting by Dave Clarke, Editing by Dave Zimmerman)

Although MBS made it through the first technical resistance level today (100-20+ in Fannie Mae 4.0's), the next challenge faced at 100-24 proved to be elusive for now. MBS briefly tested 100-25, thus entering into Friday's range for a moment before falling back down to 100-20+ now hopefully acting as support. 10yr yields also failed to push meaningfully under 2.98, heading back to the 2.99's in the hopes of finding a supportive ceiling before getting into the 3's. Simply put, the day began with weakness in bond markets, shifted toward strength, and is now somewhere in between, still undecided as far as suggesting what the rest of the day might hold.