MBS RECAP: 12/8/2011

Excerpt from the latest blog post on MBS Commentary...

MBS prices rose to their highest levels in over 2 months today as stocks and Treasury yields fall to their lowest levels of the month. Fannie 3.5 MBS were already having a pretty tough month back in October when the last iteration of an EU Summit captured the market's attention. As 10yr yields rose from historic lows in the 1.7's, MBS prices plummeted from 103-09 to 100-20. They spent most of the month languishing sideways just above those levels and the impending EU summit near the end of the month was no help. In fact, that was the catalyst for 10yr yields brief venture up to 2.40.

This time around, things are a bit different. Perhaps markets are firmly skeptical due to the rapid unwinding of optimism after the last summit. After all, MBS rose from 100-13 to 102-13 in just three days. 102-13 has more or less been the highest Fannie 3.5 price seen since then, until the last 2 days. We might point out that the January coupons that are soon to be in front of the class have NOT been any higher. That would allow us to say that both MBS and Treasuries have returned EXACTLY to the 11/1/11 levels they hit as the October Summit swings were unwound. Interesting? Intentional? Who knows... Whatever the case, trading levels are clearly conveying a high degree of skepticism heading into tomorrow's glut of European wires. Even the uber-resilient stock market has done its best to get back down to 11/1 levels:

(charts follow):

The Mortgage Bankers Association (MBA) today filed a comment letter with the Federal Housing Finance Agency (FHFA) in response to its "Alternative Mortgage Servicing Compensation Discussion Paper," a September proposal to overhaul the mortgage servicing compensation system that has the potential to dramatically change residential servicing, origination, and secondary market operations. "MBA appreciates the interest of FHFA in ensuring that we collectively work to improve service to borrowers, reduce financial risk to servicers, ensure flexibility for guarantors to better manage non-performing loans, promote market liquidity and enhance opportunities for competition in the origination as well as servicing markets," said MBA President and CEO David H. Stevens. "However, we believe that any change to the current servicing compensation model is unnecessary to accomplish these goals."

In its comment letter, MBA acknowledges that while some regulators and stakeholders believe that there is a need for change, a compelling case has not been made as to why change is necessary when the current servicer compensation system has worked well for decades.

In the event that FHFA does move forward with changes to the compensation model, MBA's letter recommends a "cash reserve structure" which calls for deferring part of the existing servicing fees as a cash reserve to cover servicing costs for catastrophic economic and default situations. The cash reserve model was developed by MBA and its members over the past six months and was proposed to FHFA this summer.

View the letter.

Household debt declined at an annual rate of 1.2 percent in the third quarter, continuing the contraction that began in the third quarter of 2008.

Home mortgage debt fell at an annual rate of 1.75 percent in the third quarter, slightly less of a decline than in the first half of the year. In contrast, consumer credit rose at an annual rate of 1.25 percent, the fourth consecutive quarter of increase.

Household net worth—the difference between the value of assets and liabilities—was $57.4 trillion at the end of the third quarter, about $2.4 trillion less than at the end of the previous quarter.

Stocks 10yr yields are testing their lows of the week as MBS rise to match yesterday's highs. In terms of December coupons, that's around 101-20 in Fannie 3.5's. But the more important justification for reprices for the better is in off-the-run January coupons (won't be off-the-run after today, meaning that when December coupons settle, January coupons will be the new "front-month" MBS coupon, aka "the one we watch") which have broken higher than the 102-06 ceiling that served as an early indication of potential improvement yesterday afternoon. January coupons are currently at 102-11, a level that should generally correspond with 102-19 in today's 3.5's. Some lenders may reprice for the better, but there are more pipeline considerations than normal with funding being tight into year end and around settlement time. Lenders don't have a ton of incentive to be aggressive with rates at the moment and that's evident from the diminishing rate sheet returns given the heady MBS prices.

The U.S. Commerce Department said wholesale inventories increased 1.6 percent, the most since May. Rising stockpiles of nondurable goods, such as paper and petroleum, drove the increase.

September's figure was also revised to show that inventories were unchanged, up from last month's estimate of a 0.1 percent decline.

The report also showed that wholesale sales increased 0.9 percent, after a 0.3 percent increase in September.