MBS RECAP: Another Down Day

Headline news is likely to take center-stage tomorrow as the Greek Parliament will take a final vote on implementing newly agreed upon austerity measures. Today's vote represented a broad acceptance of a medium-term austerity plan, tomorrow Parliament will vote on individual clauses and the implementation strategy. While the market clearly baked in a "yes" vote today, tomorrow is a little less certain, but it does appear we'll see another yes vote once all is said and done. This should give the EU, ECB, and IMF enough confidence to free up the 5th installment of Greece's bailout funds. Default avoided for now....but Greece is still "kicking the can down the road". These votes simply cover short-term funding shortages. Until bailout funds are paid back, without a huge uptick in GDP growth, Greece's solvency will be up in the air again in the future, and the market knows it. With many Greek lawmakers muttering under their breath about how unfair these austerity measure are...political gridlock is going to be an issue the next time Greece needs to pay the piper. Regarding other events, the auction cycle that just passed played a key role in ushering 10yr yields to their highest limits of the recent range and pushing BestEx Mortgage Rate quotes upward. The next two days can either help to contain recent losses, thus reinforcing the range, OR give the recent losses a big bottle of helium, a pair of moon shoes, and wish them happy travels skyward (bad for rates). Domestic data begins with Jobless Claims at 830AM followed by Chicago PMI at 945AM. Between the two, the Fed’s Bullard will speak at 9AM. For a closer look at tomorrow’s data, see this post: http://www.mortgagenewsdaily.com/mortgage_rates/blog/217562.aspx

Home loan borrowing costs rose about as much as they could yesterday without having it negatively impact Current Market Best Execution Mortgage Rate quotes. Unfortunately borrowing costs rose further today. And the levee burst. Best Execution Mortgage Rates have risen. The abrupt spike in costs can be attributed to volatility in the secondary market. CURRENT GUIDANCE: After failing on repeated occasions to extend the two-month rally, mortgage rates are acting exhausted. That means the path of least resistance is up for interest rates, at least in the short-term. That puts us in a defensive posture for the next 10 to 20 days. We are not ready to change our outlook for lower rates by the end of the summer though. This corrective behavior happened last year too, which supports our long standing view that "history is repeating itself" in the bond market. BEWARE: This is guidance is speculative in nature. We don't have a crystal ball, we can't predict the future, we can only share our outlook.READ MORE. SEE A CHART OF HISTORY REPEATING ITSELF: http://www.mortgagenewsdaily.com/mortgage_rates/blog/214431.aspx

The U.S. Department of Housing and Urban Development today announced publication of a final rule setting the minimum standards that states must meet to comply with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) in licensing mortgage loan originators. The SAFE Act was enacted into law on July 30, 2008, as part of the Housing and Economic Recovery Act of 2008. It is designed to enhance consumer protection and reduce fraud by establishing minimum standards for the licensing and registration of state-licensed mortgage loan originators. SAFE also mandates the creation of a Nationwide Mortgage Licensing System and Registry (NMLSR), and encourages all states to provide for a licensing and regulatory regime for all residential mortgage loan originators. . The final rule explains the criteria that will be used to determine whether a state has put in place a system for licensing and registering mortgage loan originators as required by the SAFE Act. The rule does so by clarifying the meaning of “engaging in the business of a loan originator,” which determines whether an individual must be licensed, and the rule also provides that certain activities do not amount to engaging in the business of a loan originator. The rule further clarifies that employees of government agencies and bona fide nonprofit organizations who act as loan originators only as part of their duties do not engage in the business of a loan originator and do not require licensure by states. The final rule does not define the terms of “loan originator” or “business of a mortgage loan originator” to include individuals who only engage in loan modifications or are third-party loan modification specialists. Instead, HUD defers to the CFPB the issue of whether such individuals should be licensed under the SAFE Act, or should otherwise be regulated under other CFPB regulatory authority. Here is the Final Rule: http://www.ofr.gov/OFRUpload/OFRData/2011-15672_PI.pdf

(USA TODAY) - In a news conference notable for its defiant tone, President Obama warned Wednesday about "unpredictable" cuts in federal programs if Congress fails to raise the nation's $14.3 trillion debt limit by Aug. 2. He challenged lawmakers to "do their job." Obama defended both his leadership on the issue and his insistence that tax increases be included among the trillions of dollars all sides want to cut from future deficits while raising the debt ceiling. The Republican leaders' position that as much as $4 trillion should be cut from spending alone, without any tax changes for the wealthy or profitable companies, isn't "sustainable" in bipartisan talks, Obama said. In calling for tax increases as part of a "balanced" deficit-reduction plan, the president repeatedly mentioned a few pet peeves, such as tax breaks for corporate jet owners and hedge fund managers that he wants to eliminate. He did not mention the broader tax increases on upper-income taxpayers that would be needed to boost revenue significantly. "The tax cuts I'm proposing we get rid of are tax breaks for millionaires and billionaires, tax breaks for oil companies and hedge fund managers and corporate jet owners," he said. With unemployment stuck at 9.1%, "the American people need to know we're also focused on jobs, and not just on deficit reduction," he said. "This is a jobs issue. This is not an abstraction," he said of the Aug. 2 deadline, which the Treasury Department has said could change by a few days. Obama also aid a payroll tax cut for workers that was enacted in December should be extended for another year. He also called on Congress to approve three free-trade agreements with South Korea, Colombia and Panama as well as legislation that would create loans for infrastructure and make it easier to get patents. WATCH MORE: http://www.usatoday.com/news/washington/2011-06-30-obama-press-conference_n.htm

One obvious lesson we've all learned from the ongoing mortgage crisis: everyone loses when consumers are unable to determine if they can afford to pay back their loans. Unfortunately recent government regulations have made credit products, especially mortgages, even more opaque with mandated disclosures in obscure legal language produced in small type. As a result, an extra burden has been imposed on lenders while providing no additional benefit to consumers. Transparency is critical and today much of the paperwork associated with a mortgage is far too confusing. Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, told a House subcommittee on March 17th that, "A simple, straightforward and consistent presentation of a credit agreement is the best way to level the playing field between consumers and lenders - and among different types of lenders - and foster honest competition." So on May 18th, the Consumer Financial Protection Bureau (CFPB) put pen to paper and released their first attempt at simplifying home loan disclosures by combining the Good Faith Estimate and Truth in Lending statement. We responded with more than 13,000 comments, and they listened. Now the CFPB has offered an even newer version and they want more feedback. This round is open for feedback until Tuesday, July 5, at 7pm Eastern time. Share feedback here: http://www.consumerfinance.gov/know-before-you-owe-were-back/

Treasury just completed it's final auction of the week with a sale of $29bn 7yr notes. Treasury will have raised nearly $44bn in new cash after $55bn in public debt matures on June 30th. Just as the previous two auctions of the week were apathetically-attended, so too was this one. Demand as measured by the bid-to-cover ratio was a below-average 2.62 bids submitted for every 1 accepted (vs. 2.87 average). A bias toward "cheapness" was displayed in the low price/ high yield investors were willing to pay/accept (2.430% high-yield vs. 2.405% 1pm "When Issued"). Indirect buyers were missing the most motivation. This can be seen in the amount of bids they tendered. Indirects only bid on $10.8bn 7s vs. their normal $17bn range. This tame tender left indirects with a measly 32% award (vs. 47% average). Directs made up for that lack of demand, partially, by taking home an above average 12% award. This represents 34% of what directs bid on, which is more than usual and potentially more than these customers wanted. Primary dealers added the remaining $16.3bn of inventory (largest % award since May 2009). Directs and Dealers either got more debt than they wanted or a great bargain here. One way or the other, Treasury had to pay -up to raise new money this week.

Reprices for the worse are a threat following the third and final poorly attended Treasury auction of the week. The 10-year note has broken range support at 3.10% and the Fannie Mae 4.0 MBS coupon has fallen below 100-00 for the first time in seven sessions (-14/32 at 100-01 currently). In our model the five major lenders reduced rebate by an average of 28.1bps (9/32) this morning. With MBS down an additional 5/32, reprices for the worse are very possible.

(Bloomberg) - Federal Reserve Governor Sarah Bloom Raskin said the financial inequality resulting from stagnating incomes for most Americans and rapid growth in wealth for the richest 1 percent is hindering the economy’s ability to recover. "This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently,” Raskin said today in prepared remarks to a forum in Washington sponsored by the New America Foundation. The disparities help “drag down maximum economic growth and are anathema to the social progress that is part and parcel of such growth,” she said. “Finding ways to help more Americans safely grow their incomes and net worth in real terms arguably diminishes the destructive influence of income inequality by giving everyone a more secure footing in the economy and the same kind of flexibility and choice available to the more affluent,” Raskin said. Raskin did not speak about the immediate economic outlook or the Fed’s plans to end its $600 billion bond-buying program on June 30 as scheduled.

"Rate sheet influential" mortgages are experiencing modest price losses today after Greek lawmakers agreed to implement aggressive austerity measures this morning. Based on the market's reaction to this news, this was a widely expected outcome. Stocks are maintaining overnight gains (+0.33%), benchmark Treasuries are near yesterday's worst levels (and range support at 3.10%) and MBS prices are marginally lower. Despite the 10-yr note being down 11/32 at 100-14, the Fannie Mae 4.0 MBS coupon is currently only -3/32 at 100-12. This stabilization is somewhat comforting but not enough to make us feel warm and fuzzy about a corrective rally before the long weekend. The last step in averting near-term default comes tomorrow when Parliament votes on a strategy to implement austerity measures. Although investors are less confident in this vote, most still believe it will pass and the EU, ECB and IMF will free up the 5th installment of Greek bailout funds. This paints a less positive picture for bonds over the next few days. Plus, after failing on multiple occasions to extend the two-month bond rally, traders are feeling technically exhausted. That means the path of least resistance is up for interest rates, at least in the short-term. That puts us in a defensive posture for the next 10 to 20 days. We are not ready to change our outlook for lower rates by the end of the summer though. Remember, this happened last year, which supports our long standing view that "history is repeating itself" in the bond market.