MBS RECAP: 11/7/2011

In the space of 15 minutes, MBS have effectively reversed most of today's gains with Fannie 3.5's moving from 102-10 to 102-03. Earlier this morning, we say prices just under 102-00, but have spent most of the day rallying to 102-10 and holding steady there--a perfect environment for reprices for the better. Many of those came across, but current market movements not only remove the possibility of any further reprices for the better, but suggest that a few lenders could reprice for the worse, with the algorithmic crowd doing so any time now, assuming prices don't magically rebound at least 4 ticks.

(Reuters) - About one-half of top U.S. banks surveyed by the Federal Reserve reported making loans or extending credit to European banks, which are under massive pressure from an ongoing political crisis.

The findings from a quarterly lending poll suggested that the U.S. banking system faces significant risks from Europe, despite relatively small direct exposure to the troubled sovereign bonds of southern European states like Greece.

"About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries, and about two-thirds of the foreign respondents indicated the same," the U.S. central bank said in its Senior Loan Officer Survey published on Monday.

Of the domestic banks, about two-thirds reported having tightened standards on loans to European financial institutions in the third quarter, many considerably.

The Fed's report was part of a wider quarterly survey on lending standards in the United States, which found fewer domestic banks loosened terms for corporate and industrial loans, another sign that growth will remain tepid.

In one bright spot, in the battered U.S. housing sector, reports of stronger mortgage demand outnumbered those of weaker demand for the first time since early 2010.

On November 1, 2011, HUD’s Mortgagee Review Board suspended the FHA origination and underwriting approval of Allied Home Mortgage Corporation. The below “Frequently Asked Questions” provide additional details regarding the implications of this action for consumers and lenders:

Q&A for Consumers
Q&A for Industry Partners

In the third quarter of 2011, 82 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Of these borrowers, 44 percent maintained about the same loan amount, and 37 percent of refinancing homeowners reduced their principal balance...

MBS have advanced enough to trip the trigger of our two friendly neighborhood algorithmically repricing lenders, and indeed this is always a potential clue that other lenders could reprice for the better, but one of two things will have to happen in order for that scenario to bear fruit.

1. We'd have to hold these gains for a longer period of time. (spectrum ranges from 20min to a few hours depending on the lender).

2. We'd have to overcome some more pronounced resistance in benchmarks as 1.98 is the 23% retracement line in TSY's from July yield lows to Sept yield lows. 1.98. This isn't out of the realm of possibility as we've rallied to 1.95-ish on recent occasions, but if 10yr yields look like they're bouncing off 1.98 as a resistance level, MBS might reconsider further gains, and thus be relegated to merely attempting to hold the 102-06 pivot.

Too soon to say for sure re: further price improvements, but certainly, there's little reason to not be floating intraday until the situation justifies.