MBS RECAP: Up Down Sideways

Home loan borrowing costs continue to hover near the best levels we've seen all year. Activity in the secondary mortgage market is getting more and more restless though as investors await an update from the Federal Reserve tomorrow and new developments in the Greek debt crisis. Intraday volatility has picked up as a result. "Volatility" in and of itself doesn't mean rates are more likely to get directionally better or worse, but it does mean lenders are more anxious about the potential for larger intraday loan pricing swings. This creates a defensive environment where rate sheets fluctuate in a wider range of offers as lenders look to stay ahead of volatility (they add cushion to rate sheets). If you can't afford (or don't want to afford) to risk what could be a meaningful increase in closing costs or even a .125% shift higher in rate, we're always in favor of protecting current offers, especially when rates are near their best levels in recent memory and high-risk, high-impact economic events are less than 24 hours away. If you float through today into tomorrow, you're basically accepting any short-term rate/cost adjustments that take place following the market's reaction to those events.

(Reuters) - JPMorgan Chase & Co said it agreed to pay $153.6 million to settle U.S. Securities and Exchange Commission charges that it misled investors about a mortgage securities transaction just as the nation's housing market was starting to plummet. Tuesday's announcement came less than a year after Goldman Sachs Group Inc agreed to pay $550 million to settle SEC charges that it did not tell investors in the Abacus CDO that hedge fund investor John Paulson helped choose the underlying securities and bet against them. According to the SEC, JPMorgan in 2007 structured a collateralized debt obligation, Squared CDO 2007-1, mainly with credit default swaps tied to other CDO securities whose value was tied to the nation's housing market. It said the Squared CDO's marketing materials said the underlying investments were chosen by a GSC affiliate. But in fact, Magnetar played a significant role and would benefit from defaults because of a nearly $600 million short position, it said. The SEC also filed civil charges against Edward Steffelin, a principal at GSC Capital Corp, accusing him of drafting misleading marketing materials for the transaction that failed to reveal that the Magnetar Capital LLC hedge fund helped choose and bet against the underlying securities. In a conference call, SEC enforcement chief Robert Khuzami said he did not anticipate the agency bringing charges against any JPMorgan executives in connection with the CDO case. JPMorgan did not admit wrongdoing in agreeing to settle.

Rate sheet influential MBS prices have continued to climb and are now +7/32 at 100-25 after touching 100-14 earlier in the session. These price appreciations have led to scattered reprices for the better, but nothing widespread yet. However if these gains hold we'd expect to see more lenders recall and reissue for the better. Otherwise, with stocks hovering near their intraday highs, the chance for MBS price volatility remains elevated. This will keep some lock desks defensive and potentially even dissuade them from repricing for the better.

The stock lever has disconnected from bonds, in a good way. Although the S&P is now 1.24% better on the day, benchmarks are making a comeback and production MBS coupons have pulled a total 180. After falling as low as 100-14 early in the session, the Fannie Mae 4.0 is now +4/32 at 100-22. This 8/32 reversal is enough reason for aggressive lenders to reprice for the better. In Treasuries, the 10-year note has seen buying (short covering) near technical support at 3.00%, regardless of equities holding near their best levels of the day. Remember the 10yr note was bid at 2.89% just yesterday morning. With many investors parked on the sidelines and trading volumes below average, this directional volatility was expected given the lack of liquidity in the marketplace. What it tells us about loan pricing is lenders will likely be adding some cushion to rate sheets to account for a wider intraday trading range ....we will alert if reprices for the better are awarded.