MBS MID-DAY: 10/27/2011

The current state of the national economy continues to affect the remodeling industry, according to the latest National Association of Home Builders' (NAHB) Remodeling Market Index (RMI). The index dropped to 41.7 in the third quarter from 43.9 in the second quarter, after having reached a four-year high of 46.5 in the first quarter. An RMI below 50 indicates that more remodelers report that market activity is declining than report that it is increasing.

"Remodelers report that while many consumers show interest in having remodeling work done, they are slow to commit to projects," said NAHB Remodelers Chairman Bob Peterson, CGR, CAPS, CGP, a remodeler from Ft. Collins, Colo. "Consumers are in a 'wait and see' mode with regard to current economic conditions."

The Federal Housing Finance Agency (FHFA) today released updated projections of the financial performance of Fannie Mae and Freddie Mac, including potential draws under the Senior Preferred Stock Purchase Agreements with the U.S. Department of the Treasury. FHFA first released financial projections in October 2010, and these updated projections show similar results for two out of three scenarios, and a decrease in cumulative Treasury draws in one scenario. Through the FHFA Conservator’s Report, FHFA tracks actual performance versus projections on a quarterly basis.

Full Report

It might as well be one of the calmer moments on Monday according to MBS prices which are significantly weaker overnight, but well off their 10/24 lows. Fannie 3.5's are currently down 11 ticks on the morning at 100-27. 10yr yields are attempting to dig in at their first of many potential support levels beginning around 2.30 (currently 2.2876) after having tested 2.30 and above on several occasions.

All the fuss this AM is due to additional news out of the EU summit as well as the "after-party" meetings. Details are:

- EFSF leverage up to 1 trln Euros or $1.4 Trln
- Greece's investors agree to 50 pct haircut (100 bln Euros)
- 106 bln Euro recapitalization of other weaker banks in the EU
Most of these details were similar to more optimistic expectations heading into the summit, but the word "details" might be a bit misleading as the actual nuts and bolts are somewhat lacking.

We discussed 2.30 in 10yr yields as a potential support level yesterday and so far, we're seeing that play out today. Jobless claims YET AGAIN over 400k and a GDP that exactly met expectations seem to have done little to sway markets one way or the other. Rate sheets will be weaker than yesterday, and we're in "watch and wait" mode to assess the evolution of this post-EU-Summit trade. That's a slightly better eventuality than falling quickly towards PAR in 3.5's or testing 2.35/2.4 in 10yr notes.