MBS RECAP: 10/18/2011

Fannie 3.5's dipped under 101-00 a few times before trying to stabilize in the low 101's. They're still trying actually, and mostly succeeding (101-08 currently) with the help of an S&P Index that failed a break of 1230 minutes before the close. 10yr yields are back down to 2.175

This late-day tape bomb out of Europe adds a big layer of complexity to what was already a fairly robust day of economic data. Tomorrow brings CPI, Housing Starts, plenty of Fed-Speak as well as the Beige Book. Factoring in tonight's shot of adrenaline for the risk-on vs risk-off battle and it should be interesting.

The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to transition away from current foreclosure attorney network programs and move to a system where mortgage servicers select qualified law firms that meet certain minimum, uniform criteria. Under current practice, in certain states each Enterprise designates law firms eligible under the Enterprise’s criteria to undertake foreclosure work and mortgage servicers then select and work with these firms. The new approach is in line with FHFA’s Servicing Alignment Initiative that produced uniform foreclosure processing standards to assist servicers, homeowners and lenders. FHFA believes these efforts will lead to greater transparency and benefit delinquent borrowers who become subject to the foreclosure process. Further, the change will be supportive of the Consent Orders entered into by financial regulators and servicers. The changes will be implemented after a transition period in which input will be taken from servicers, regulators, lawyers and other market participants. During this period, existing contracts remain in place and in effect.

Germany and France just agreed to boost the EU bailout fund to 2 trillion Euros. Stocks soaring, MBS tanking.. Fannie 3.5's down to 100-30. Reprices for the worse likely if these levels persist, and potentially will come faster than usual given the precipitous move and obvious headline causality. (not necessarily the end of the world for bond markets, but not good for this afternoon).

(Reuters) - The Kansas City and Dallas Federal Reserve banks pressed for an increase in the rate the Fed charges banks for emergency loans ahead of the central bank's last policy gathering, meeting minutes showed on Tuesday.

Directors at the Kansas City Fed voted three times, from mid-August to mid-September, to request the Fed's Washington-based Board of Governors raise the discount rate. The Dallas Fed sought an increase at only the most recent of its three meetings during the period.

The other 10 regional Fed banks wanted to keep the so-called discount rate at its current level of 0.75 percent, and the Fed board sided with the majority, minutes of discount rate meetings released on Tuesday showed.



Supporters of an increase in the discount rate to 1 percent from 0.75 percent wanted to normalize the difference between the emergency loan rate and the Fed's benchmark fed funds rate, which is in a range between zero and 0.25 percent, according to the minutes.

The fed funds rate, which the Fed sets by buying and selling short-term Treasury securities with dealers, is historically the central bank's main lever for accelerating or slowing economic growth. The Fed has kept the short-term rate near zero since December 2008 to pull the economy out of recession and support recovery. (Reporting by Ann Saphir; Editing by Leslie Adler)

Until literally a few moments ago, the most likely result of a lender reprice would have been a price improvement, but with the past few moves on our screens, Fannie 3.5's are down to 101-05 from 101-13. That shifts risks negatively for the reprice outlook, at the very least removing the possibility of reprices for the better and introducing the possibility of reprices for the worse.

Fannie 3.5's are now 5 ticks higher on the day at 101-13 and have been fairly resilient since putting in their lows of the day around 9am.

Treasuries have similarly been strong and there's been some hesitance in the stock market attempting to break free from the lever with the bond market.

If MBS continue to trade at current levels, some lenders may reprice for the better. More broad-based reprices would probably occur if 3.5's convincingly challenged the 101-16 level.