MBS MID-DAY: Slow Start

(NAHB) - Builder confidence in the market for newly built, single-family homes rose two points to 15 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today. The gain largely offsets a three-point dip recorded in June, and marks the ninth time out of the past 10 months in which the index has held within the same three-point range. "While builders continue to confront serious challenges with regard to competition from foreclosed properties that are priced below replacement cost, inaccurate appraisals of new homes, and a very restrictive lending environment for new home construction, select markets are showing gradual improvement as consumers begin to take advantage of very favorable buying conditions," said Bob Nielsen, chairman of the National Association of Home Builders (NAHB). Two out of three of the HMI's component indexes rebounded in July from declines in the previous month. The component gauging current sales conditions rose two points to 15, returning to its May level, while the component gauging sales expectations in the next six months rose seven points to 22, which is where it stood in April. The component gauging traffic of prospective buyers held even with the previous month, at 12. Regionally, the HMI inched up one point to 12 in the Midwest and posted three-point gains in both the South and West, to 17 and 14, respectively. Only the Northeast posted a decline, slipping two points to 15. "We view the upward movement in the July HMI as a correction from an exceptionally weak number in June that was at least partly attributable to negative economic news and the close of a disappointing spring selling season," said NAHB Chief Economist David Crowe. "The strong rebound in sales expectations for the next six months likewise marks a return to trend. Basically, the market continues to bounce along the bottom, with conditions in some locations beginning to improve."

(Reuters) - U.S. Treasury prices rose on Monday as uncertainty over how Europe will tackle its debt crisis boosted demand for safe haven bonds, and overcame any fears that the U.S. could default if lawmakers fail to raise the country's debt ceiling. Eight European banks failed a test of their ability to sustain a long recession in results released on Friday, though the exercise has been criticized for being too soft and failing to account for a Greek default. European leaders will meet in Brussels on Thursday to discuss how to stem contagion from the troubled nation. "There is a significant amount of uncertainty in Europe right now, that's the major theme, and the question is whether the problems can be resolved effectively or quickly," said Jim Golden, head of Treasury trading at Jefferies & Co in New York. The safety bid from Europe boosted U.S. bonds even as lawmakers in Washington remained at odds over how to reduce the country's deficit, with only five days remaining before President Obama's deadline for a deal to raise the debt ceiling. "Europe is a lot more complicated, there are many more entities involved and it's not clear that it's not going to involve some sort of default by somebody," said Golden. "For the U.S. its more of a relatively short term political issue," he said. "I don't think anybody realistically expects the U.S. to default."

The floor is falling from underneath stocks and a "flight to safety" is flowing into the Treasury market. Although MBS are lagging the benchmark interest rate rally, this move has been positive for MBS price levels and rate sheets. The Fannie Mae 4.0 MBS coupon is now +5/32 at 100-30 after ticking down to 100-23 in early trading action. The change of direction comes at a good time as many lenders are in the process of building rate sheets. That means, if your pricing hasn't been issued yet you are likely to experience delays as secondary takes down new indications to better reflect current market conditions. If your pricing is already live you may see early reprices for the better.

This is the definition of contagion.......(Reuters) - Standard & Poor's on Friday raised the pressure on debt negotiators in Washington, saying it could downgrade insurers, securities clearinghouses, mortgage agencies and a laundry list of other firms without a deal soon to lift the debt ceiling and cut the deficit. While S&P had already made clear it could downgrade the United States' sovereign credit rating, the Friday move struck directly at the heart of the financial system, raising the prospect of knock-on effects should the country exhaust its ability to borrow to pay bills. S&P on Friday put on review for possible downgrades a range of powerful financial firms -- many of them little known to the public but crucial to the country's financial infrastructure. U.S. government securities are central to the operations of most of the companies cited. They include the Depository Trust Co, which facilitates payment transfers among major banks, as well as several Federal Home Loan Banks and Farm Credit System Banks. They also singled out Fannie Mae and Freddie Mac, the two government-sponsored enterprises that are central to the residential mortgage market. S&P characterized its targets as "entities with direct links to, or reliance on, the federal government." Separately, the agency said the four remaining U.S. nonfinancial companies with triple-A ratings were not affected by the downgrade threat. "S&P is firing a warning shot, saying the entire financial clearing system is in question," said Peter Niculescu, a partner at Capital Markets Risk Advisors, a risk management advisory firm in New York.

This is a topic of great interest to MND as we've advocated more leniency in reconstruction and rehabilitation loan guidelines. With so many foreclosed properties sitting empty on the market we expect remodeling and rehabbing to be a leading indicator of a bottom in the housing market. From that perspective, FHA should open its 203(k) program to investors if they want to accomplish their affordable housing goals and loan originators should add this product to their offering as there will be much opportunity to close reconstruction loans in the years ahead (Beware: 203k's can be tough)...... (Build Fax) - The latest BFRI, detailing remodeling activity from May 2011, indicates that residential remodeling activity registered the nineteenth-straight month of year-over-year gains, demonstrating that many Americans are continuing to remodel their current homes, rather than purchasing new homes. The May 2011 index rose 22 percent year-over-year in May to 124.3, the highest number ever in the index to date. "Even with the continued struggles in the economy, the remodeling industry has been a bright spot, as consumers look to make upgrades to their current homes, rather than purchasing a new residence. Based on the trends from the first months of this year, we expect to continue seeing strong gains from coast to coast." said Joe Emison, Vice President of Research and Development at BuildFax. All regions were up month-over-month, with the Northeast up 9.8 points (12%), the South up 7.3 points (7%), the Midwest up 16.3 points (18%), and the West up 8.7 points (7%). Even though the Midwest was up month-over-month, it continues to lag the other regions (as it has for the past three months) in year-over-year performance, down 10.6 points (11%) year-over-year. All other regions were up year-over-year, with the Northeast up 7.2 points (9%), the South up 9.5 points (10%), and the West up 20.7 points (21%).

(Reuters) - Confusion over competing policy proposals reigned among officials and bankers on Monday as Europe struggled to put together a second bailout of Greece and prevent the region's debt crisis from spreading. French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year. But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings. The uncertainty pushed the euro down against other currencies on Monday and the government bond yields of indebted euro zone states rose, with Italy's 10-year yield climbing more than 0.2 percentage point to a euro-era high. Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt. But all of the schemes could face major technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported on Monday that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece. An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything.

Reuters) - Foreigners bought fewer long-dated U.S. securities in May and, including bills and other short-term instruments, were net sellers of all U.S. assets for the first time in 11 months, U.S. Treasury data showed on Monday. The United States attracted a net long-term capital inflow of $23.6 billion after $30.6 billion in April. Including short-dated assets such as bills, foreigners sold a net $67.5 billion, reversing the prior month's upwardly revised net inflow of $66.6 billion. The May tally was the first net outflow since June 2010. Foreigners still increased net Treasury note and bond purchases by $14.6 billion. China, the largest foreign U.S. creditor, held $1.160 trillion in May, from $1.153 trillion. (Reporting by Steven C. Johnson; Editing by Chizu Nomiyama)

Fannie Mae 4.0's are now unchanged from Friday's close at 100-25. Late Friday, that figure had been closer to 100-29 until the last few trades of the session brought it down. Earlier this morning as well, MBS clawed back toward 101-00, but unwinding of a bit of Treasuries' flight-to-safety trade from the European session is currently pressuring MBS lower. TIC data is coming up at 9am.

(Reuters) - With five days remaining before President Barack Obama's deadline for a deal to raise the U.S. debt ceiling, Republicans and Democrats have yet to agree on a big plan to cut the nation's deficit and raise its debt limit in time to avoid an unprecedented U.S. default. Efforts to reach a comprehensive deficit-reduction deal are at an impasse over tax breaks as lawmakers -- with an eye on 2012 elections -- hold on to entrenched positions. This week, senators will likely move forward with a potential fallback plan that would authorize more borrowing power and could also include some spending cuts. Obama had set a Friday deadline for Congressional leaders from both parties to agree on a deal to raise the country's debt ceiling. He said the July 22 deadline would give Congress enough leeway to write and pass legislation before Aug. 2, when the government will run out of money to pay its bills. Failure to increase the debt ceiling by then could send shockwaves through global financial markets and may plunge the United States into another recession, economists have warned. Credit rating agencies have signaled they may cut the top-notch AAA U.S. rating if the borrowing limit is not raised and deficit reduction measures are not laid out. (by Deborah Charles)