MBS RECAP: 1/18/2012

10yr yields dashed to their highs in the steepest and highest volume movement of the session following the Fed's scheduled buyback in the 8-10 year sector. Dealers had $15.9 bln on offer, and the Fed took down $4.65 bln of that, apparently not enough for the street... Prices cheapened, yields rose, MBS followed with timid capitulation. Nothing of major significance is happening here! Just a minor course correction that might look bigger than it is due to the narrowness of recent trading ranges. Even so, we wouldn't put it past a lender or two with a predisposition for an itchy trigger finger to reprice for the worse. At current price levels, this wouldn't make much sense to us, but some lenders have repriced for the worse in similar past situations. Still... this wouldn't be a widespread phenomenon unless prices fell much further.

Housing and Urban Development Secretary Shaun Donovan on Wednesday said about one million borrowers are expected to benefit from principal reductions on their mortgages as part of a wide-ranging settlement with banks over dubious foreclosure practices.

He said the settlement talks are "very close" to a conclusion during a speech before the Winter Meeting of the U.S. Conference of Mayors. Banks and government officials have been negotiating for months to settle an investigation into the faulty foreclosure practices.

Donovan said about one million write-downs are expected, and there are also a number of families that would "get direct compensation as a result of the settlement."

"Principal reduction can have a substantial impact on the housing market nationally," he said.

Highlights:

• Economic growth will likely strengthen to about 2.1 percent in the first quarter.
• The current U.S. unemployment rate of 8.5 percent is likely to increase after seasonal gains are reversed.
• Mortgage rates are projected to remain very low, at least in the beginning of 2012.
• For 2012, expect home sales to grow between 2 and 5 percent year-over-year.
• The housing-market recovery will be delayed as long as there remains a large gap between buyer and seller sentiment.

Frank Nothaft: "With the new year comes a sense of cautious optimism. There are some positive signs in the job market and consumer confidence; housing is starting to raise hopes for continued gradual economic recovery. But the economy still is giving some mixed messages."