MBS MID-DAY: 10s Set New Low

SUBJECT: Trial Payment Plan for Loan Modifications and Partial Claims under Federal Housing Administration’s Loss Mitigation Program PURPOSE: The purpose of this Mortgagee Letter is to identify circumstances under which mortgagors must successfully complete a trial payment plan prior to the mortgagee executing a loan modification or partial claim action under the Federal Housing Administration’s (FHA) Loss Mitigation Program. In addition, this Mortgagee Letter announces the time requirements for mortgagees to complete permanent loan modification and partial claim documents in order to receive an incentive fee. These requirements are effective October 1, 2011… To read the letter click below:

Yes it can. After the overnight swings and earlier AM data left 10yr yields fairly close to 2%, a catastrophically awful Philly Fed report helped nudge them into the 1's. This is a new all-time intraday low. As far as the broad significance of this, we'd go back to what we said before it actually happened: "The market has a tendency to break such seemingly monumental technical levels simply to show us that nothing is too monumental for the markets to accomplish. We think 2% is some "big deal?" Markets will show us they don't care what they think, go for a quick touch of, say, 1.97, and then right back up over 2%. It might not happen that way today, but if it did, it would mean relatively little beyond simply reinforcing that we are the students and the market is the teacher, and we would be wise not to forget it." After all, 1.97 is indeed where things bounced and 10's are indeed now back over 2%. MBS spike big time at first (over 105-00 in 4.0's - intraday record) but have since returned to earlier highs at 104-25 and 102-07 in Fannie 3.5s. Reprices for the Better are possible.

(Reuters) - A gauge of future U.S. economic activity rose more than expected in July to a record high as the money supply increased and fewer people filed for jobless benefits, the Conference board said on Thursday. At the same time, the board said momentum for growth was weak and the index showed little signs of acceleration. The Leading Economic Index increased 0.5 percent to 115.8 after a 0.3 percent rise in June. Economists polled by Reuters had expected the index to rise 0.2 percent. "The economy should continue to expand at a modest pace though the fall," said Ken Goldstein, an economist at the board. However, "the economy is slow, with little momentum." (Reporting by Jason Lange; Editing by Neil Stempleman)

(Reuters) - U.S. existing-home sales unexpectedly dropped in July as cancellations of pending contracts continued to depress buying activity. The National Association of Realtors said sales fell 3.5 percent month over month to an annual rate of 4.67 million units. June's sales were upwardly revised at a 4.84 million-unit rate. Economists polled by Reuters had expected sales to rise 3.8 percent to a 4.90 million-unit pace. Compared to July 2010, sales were 21 percent higher. (Reporting by Margaret Chadbourn; Editing by Kenneth Barry)

(Reuters) - Factory activity in the U.S. Mid-Atlantic region plummeted in August, falling to the lowest level since March 2009, a survey showed on Thursday. The Philadelphia Federal Reserve Bank said its business activity index dropped to minus 30.7 from positive 3.2 the month before and was far below economists' expectations for positive 3.7, according to a Reuters poll. Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware. It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the larger national report by the Institute for Supply Management. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

Here's something very important to remember, or at least something that could be interesting to think about when it comes to questions such as the one posed in the title. The market has a tendency to break such seemingly monumental technical levels simply to show us that nothing is too monumental for the markets to accomplish. We think 2% is some "big deal?" Markets will show us they don't care what they think, go for a quick touch of, say, 1.97, and then right back up over 2%. It might not happen that way today, but if it did, it would mean relatively little beyond simply reinforcing that we are the students and the market is the teacher, and we would be wise not to forget it.

To say "MBS Benefit" is bit misleading considering the only real beneficiary this morning is Treasuries. MBS prices are slightly improved, but Treasuries are greatly improved. That's a fairly normal phenomenon when risk-aversion is the source of a rally. That's the case this morning as Asian and European markets went from bad to worse overnight. Reasons range from rumors the ECB is buying Spanish/Italian Debt to several Euro-zone countries saying they will pursue their own agreements with Greece. That makes the Greek bailout look increasingly shaky. Bad for risk markets, good for Treasuries. Speaking of that, 10yr notes are 8 bps lower this morning at 2.087. That's a 23 tick gain in terms of PRICE whereas MBS in terms of Fannie 4.0's are up only 6 ticks and 11 ticks in 3.5's. New origination volume was pathetic yesterday, less than a billion in TBAs and again, no 3.5s. But with the spread between 3.5's and 4.0's now at 2-26, we're at a tipping point where the former should accelerate its gains in market share. Despite the aggressive gains, volatility has been fairly low this morning. So rate sheets don't have much reason to be delayed unless lenders wait for the several pieces of economic data at 10am. That said, markets don't much seem to care for domestic economic reports right now, opting instead for European headlines. Rates should be improved.

Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter. The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say. Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks. In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23. (By DAVID ENRICH And CARRICK MOLLENKAMP) full story:

(Reuters) - U.S. economic growth in the first half of the year has been "quite a bit slower" than expected, a top U.S. central bank official said on Thursday, causing him to temper his expectations about the pace of economic recovery. William Dudley, the president of the Federal Reserve Bank of New York, told business leaders in New Jersey that only some of the restraints on growth in the first half of the year, such as high oil prices and Japan's earthquake, can be considered temporary. "It is clear to me that not all of the weakness was due to these one-time factors, and in light of this, I have revised down my expectations for the pace of growth going forward," he said. The central bank's policy-setting Federal Open Market Committee (FOMC) took the unprecedented step last week of promising to keep interest rates near zero for a set period of time, at least until 2013. The Fed also said it was weighing other options to help strengthen a weak recovery. Dudley noted that market interest rates fell after the announcement, "which should help provide some additional support for economic activity and jobs." Expanded hiring and output nationally would help boost activity in many New Jersey industries, he added. Dudley was visiting the state to discuss regional economic developments. The state faces challenges in high debt and delinquency levels and a jobless rate slightly above the national rate, he said, but job growth in New York City should provide opportunities. (Reporting by Edith Honan, Writing by Steven C. Johnson,Editing by Chizu Nomiyama)

(Reuters) - U.S. consumer prices rose faster than expected in July as gasoline rebounded sharply, but a moderation in underlying price pressures backed the Federal Reserve's view of a low inflation environment. The Labor Department said its Consumer Price Index increased 0.5 percent, the largest gain since March, after falling 0.2 percent in June. Economists polled by Reuters had expected a 0.2 percent rise last month. Gasoline, which rose 4.7 percent after falling 6.8 percent the prior month, accounted for about half of the rise in CPI last month. Core CPI -- excluding food and energy -- rose 0.2 percent after rising 0.3 percent in June. Last month's gain was in line with economists' expectations. The Federal Reserve last week promised to keep interest rates near zero at least until mid-2013 to boost growth and said the outlook for inflation over the medium-term was subdued. Data on Wednesday showed wholesale prices, excluding food and energy, rose at their quickest pace in six months in July, with the year-over-year increase the largest since June 2009. Given limited pricing power for producers as consumers grapple with a 9.1 percent unemployment rate, inflation is not regarded as a threat now for an economy which barely grew in the first half of the year. Food prices rose 0.4 percent after increasing 0.2 percent in June, also contributing to the large gain in the CPI rate. In the 12 months to July, core CPI increased 1.8 percent -- the largest increase since December 2009. This measure has rebounded from a record low of 0.6 percent in October and Fed would like to see that closer to 2 percent. Overall consumer prices rose 3.6 percent year-on-year, rising by the same amount for a third straight month. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)

(Reuters) - New U.S. claims for unemployment benefits rose more than expected last week, according to a government report on Thursday that suggested hiring in August was steady but not robust. Initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 408,000, the Labor Department said. Economists polled by Reuters had forecast claims rising to 400,000. The prior week's figure was revised up to 399,000 from the previously reported 395,000. The claims data covers the survey week for August nonfarm payrolls. Claims dropped by 14,000 between the July and August survey periods, but there are fears that financial markets turbulence could have slowed hiring this month. Employers added 117,000 jobs in July, a significant improvement from the prior two months' combined 99,000 gain. The rise in jobless claims, which took them just above the 400,000 threshhold, is unlikely to change perceptions that the economy will dodge another downturn. Claims below the 400,000 mark are usually associated with a stable labor market. A Labor Department official said there was nothing unusual in the state-level data. The four-week moving average of claims, considered a better measure of labor market trends, fell 3,500 to 402,500. The number of people still receiving benefits under regular state programs after an initial week of aid increased 7,000 to 3.70 million in the week ended Aug. 6. The number of Americans on emergency unemployment benefits fell 27,704 to 3.13 million in the week ended July 30, the latest week for which data is available. A total of 7.34 million people were claiming unemployment benefits during that period under all programs, down 143,737 from the prior week. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)