MBS RECAP: Auction Time

Tuesday and Wednesday are a bit light on economic reports compared to the last two days of the week. But unlike today, at least there is an economic report! The International Trade report prints at 830am with a forecasted trade balance -$44.0 bln from a previous reading of -$43.7 bln. Unless there's a real blowout deviation from those expectations, the more important events of the day will come in the afternoon with the 1pm auction of 3 Year Treasury Notes and the 2pm Release of the FOMC Minutes. Granted, these are just the minutes from the meeting connected the announcement that has already been released, but markets are always receptive to the potential additional insights to FOMC decision-making. Read more about the whole week of potential market movers and scheduled data right here:

The U.S. Department of Housing and Urban Development (HUD) today announced an agreement with Fidelity National Financial, Inc. (FNF) to settle allegations the title company paid real estate brokers and other settlement service providers improper kickbacks or referral fees in violation of the Real Estate Settlement Procedures Act (RESPA). HUD claimed FNF and its affiliates and subsidiaries engaged in a widespread and years-long campaign to pay real estate brokers kickbacks for the referral of real estate settlement services, including home warranties and title insurance.FNF agreed to cease this practice and pay HUD $4.5 million to resolve the complaint. "RESPA is very clear that paying fees or providing anything of value for the simple act of referring business is a violation of law," said Acting FHA Commissioner Robert Ryan. "This agreement should be a signal to others that these business practices won’t be tolerated."

After Rep. Frank's comments on QRM and risk retention today, the MBA is out with a response that we think brings some more balance to Frank's point of view. In essence, they support QRM, but stresses the need to "get it right." Take a look: "Stevens Reiterates MBA's Support for Risk Retention WASHINGTON, D.C. (July 11, 2011) - David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), issued the following statement following remarks by Congressman Barney Frank (D-MA) this morning at the National Press Club. "MBA, as we have said many times, supports risk retention and believes it is an important step in establishing a regulatory plan to protect borrowers and ensure a safe and sustainable mortgage system. The QRM exemption in Dodd-Frank was designed to recognize that traditional mortgage loans - standard products, properly underwritten and fully documented - were not the cause of the recent crisis. "In order for risk retention to work, to create a functioning mortgage system that protects and serves borrowers, regulators must get the QRM right, and we do not believe that the rule, as proposed, gets it right. Hardwiring down payment, loan to value (LTV) and debt-to-income (DTI) requirements into the regulation is unnecessary. Data shows that it would needlessly limit homeownership opportunities for well-qualified borrowers, while at the same time offering little corresponding benefit preventing defaults."

There's a lot of variability in how individual lenders have priced over the past few sessions depending on the release time and aggression level of initial rate sheets and reprices. Some lenders gave more "love" in Friday reprices, while others waited until initial releases this morning. But the net effect over the two sessions is current pricing in line with levels from about 6 sessions ago, and in some cases beyond. Several lenders offered rate sheets with rebate improvements that superseded MBS gains. Speaking of MBS gains, Fannie 4.0's are currently up 3/8ths of a point to 100-30, and have held above 100-25+ for the better part of the day. Whereas MBS have seen some resistance to breaking through their best levels of the morning, 10yr Treasuries have set 3 new yield lows over the course of the day. MBS are lagging a bit in that regard--not uncommon into bond market rallies, and also not uncommon for variations in relative performance near settlement dates. Fannie and Freddie 30yr pools settle this week, with the roll happening tomorrow evening.

It's not that the Dodd-Frank rules are clearly classifiable as an outright "negative" for the mortgage market. But anything that adds requirements and restrictions to secondary mortgage markets right now is challenging at these levels of mortgage financing demand, regardless of their intention to promote the long-term health of the industry. In other words, even if something like Dodd-Frank is a pill the mortgage market needs to swallow, it's still bitter. But whereas Dodd Frank is a divisive topic, the issue of maintaining Fannie/Freddie loan limits is less so. And on this topic, Barney Frank's comments that loan limits should be permanently increased, may be better aligned with sentiment among mortgage originators. He noted that given the currently weak state of the housing market that now would be "an especially bad time economically" to let the October 1st deadline pass without extending loan limits or making them permanent. We wouldn't argue. Frank also said that it "makes no sense" for federal policy to ignore variations in home prices in different geographies.

About four times a year, The Fed conducts the Senior Loan Officer Opinion Survey on Bank Lending Practices. The purpose of the survey is to provide qualitative and limited quantitative information on credit availability and demand, as well as evolving developments and lending practices in the U.S. loan markets. The title of the survey is somewhat misleading as it's not targeted at mortgage loan officers. For instance, highlights from today's survey results focus instead on hedge funds, insurers, and institutional investors. Dealers reported that financing terms have eased somewhat for the aforementioned counterparties. In addition, financing terms for most of the instruments financed by those counterparties eased, including equities and asset-backed securities, with the use of leverage roughly between the pre-crisis peak and post-crisis trough. While this survey may not be specific to the mortgage industry, if it indicates several categories of investors are seeing slightly looser credit guidelines, it speaks to the overall concept of "credit availability" in secondary markets.

After having been confined to a narrowing range, Fannie 4.0's have broken from that pattern and moved in linewith their highest levels from this morning, currently at 100-31, surpassing mid day highs by 2/32nds. 10yr Treasuries at 2.919 are officially at their best levels of the day. One lender has repriced for the better and others may follow if current levels are maintained or improved upon. Further gains, held more stably would likely be required for widespread reprices. As it stands, there's not a clear motivation for more than a few of the ahead-of-the-curve lenders to reprice.

(Reuters) - Representative Barney Frank said a broad campaign to water down a proposal to make mortgages safer was undermining the most critical part of last year's Dodd-Frank financial oversight law. Both consumer advocates and banking groups have balked at a regulatory proposal that would only allow banks to bundle and fully sell off to investors mortgages that include a 20 percent down payment. The idea is to have banks retain a portion of loans on their books and to avoid a repeat of the subprime crisis in which they churned out doomed-to-fail mortgages because they could hand off the risk to investors. "I am troubled now because there is an assault on risk retention," Frank said. "I believe that risk retention is the single most important piece of this bill." Frank spoke at the National Press Club on the Dodd-Frank law as it nears its one-year anniversary on July 21. In March, regulators proposed that banks keep 5 percent of loans on their books unless they fit into a "qualified residential mortgage" category. QRMs would have to meet strict underwriting standards and include a 20 percent down payment. Banks, housing groups and lawmakers from both parties have complained that this exemption is too narrow and will make it difficult for worthy borrowers to get a home loan. Frank did concede that he believes a 20 percent down payment requirement is too high, although one in the mid- to high-single digits is more acceptable as long as it is accompanied by other creditworthiness measures. But he hit back at critics who say the risk-retention reform is unduly disruptive to the housing market. "Yes, it's disruptive because we had to disrupt a rotten system," Frank said. (Reporting by Dave Clarke; Editing by Lisa Von Ahn)

(Reuters) -- U.S. policymakers could and should do more to identify and deflate asset bubbles before they pop and harm the economy, research from the San Francisco Federal Reserve suggested on Monday. The Fed set the stage for the housing bubble by keeping interest rates low through 2004, sparking a refinancing boom that pushed consumer borrowing and spending to unsustainable levels, according to research published in the San Francisco Fed's Economic Letter. When the bubble burst, household finances were upended, resulting in $7,500 of foregone spending per person compared to the pre-recession period, San Francisco Fed senior economist Kevin Lansing found. That lost spending reflects dramatically lower household net worth and the curtailment of lax lending standards that fueled the bubble in the first place, he said. "The extensive harm caused by the Great Recession raises the question of whether policymakers could have done more to avoid the crisis," Lansing said. Conventional wisdom says it is too hard to identify bubbles except in hindsight, and that in any case monetary policy is too blunt a tool to address them. Lansing's paper questioned both assumptions. "Using monetary policy to lean against bubbles may not represent such a radical departure from conventional wisdom," Lansing added. "If a bursting bubble can set the stage for deflation, which in turn would be 'highly destructive' to the economy, then the case for preemptive action against bubbles may be strong indeed." Central bankers already track other real-time measures like the output gap, Lansing argued, and bubbles can be detected by looking at other potential threats to financial stability, like unchecked credit expansion. And while regulation is an important tool for preventing bubble formation, he said, it can be unreliable because regulators tend to relax once a crisis has passed. (Reporting by Ann Saphir; Editing by Leslie Adler)

(Reuters) - President Barack Obama pushed congressional leaders for the largest possible deficit-reduction deal on Monday that would involve changes to popular entitlement programs, asking: "If not now, when?" Obama told a White House news conference he would meet every single day with top U.S. lawmakers until an agreement is sealed to avoid defaulting on the national debt with the clock ticking to an August 2 deadline. He planned talks at 2 p.m. EDT on Monday with them to try again to break a stalemate over reducing the country's $1.4 trillion deficit and clear the way for a vote to increase the $14.3 trillion debt ceiling. The Treasury Department has warned that it will run out of money to cover the country's bills if Congress does not raise the debt limit by August 2. Failure to do so could push the United States back into recession, send shock waves through global markets and threaten the dollar's reserve status.