MBS RECAP: 2/21/2012

(Reuters) - The Boston Federal Reserve unsuccessfully wanted in January to trim the rate the Federal Reserve charges banks for emergency loans, in part to align the so-called discount rate with the rate the Fed charges foreign central banks for dollar swaps.

Forecasts for modest growth ahead, continuing weakness in housing markets and high unemployment were also among reasons why the directors of the regional Fed bank sought a cut to 0.5 percent from the current level of 0.75 percent, according to minutes of meetings released on Tuesday by the Fed.

The Fed cut its principal policy rate, the fed funds rate, to near zero in December 2008.

While Boston sought a decrease the Kansas City Fed wanted to raise the discount rate to 1 percent, in part to restore the 1 percentage point spread between the fed funds rate and the discount rate that prevailed before the financial crisis that began in 2007.

Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco today sent to Congress a strategic plan for the next phase of the conservatorships of Fannie Mae and Freddie Mac (the Enterprises). The plan builds on the Acting Director’s February 2010 letter to Congress on the conservatorships and sets forth objectives and steps FHFA is taking or will take to meet FHFA’s obligations as conservator. Fannie Mae and Freddie Mac were placed into conservatorships Sept. 6, 2008 and have since received more than $180 billion in taxpayer support. FHFA identifies three strategic goals for the next phase of the conservatorships:

-Build: Build a new infrastructure for the secondary mortgage market;
-Contract: Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations; and
-Maintain: Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

Whether or not you'll see a reprice for the worse here depends largely on the lender in question, but with Fannie 3.5's falling to 103-02--their lows of the day--it's an increasing risk.

10yr yields have moved out of their sideways trend and broken higher, now up to 2.07%. Even so, some lenders will have priced late enough or conservatively enough to not be at much of a risk to reprice, while the traditionally faster-to-act crowd could be fairly close at currently price levels.

Please be aware that day-over-day pricing is currently displaying incorrectly due to a trade that was reported yesterday while markets were closed.

This does not effect Treasuries, nor does it affect the accuracy of the currently reported pricing. The error is that the day-over-day change column for MBS will appear to be roughly 9/32nds higher than it should be. Using Fannie Mae 3.5 coupons for instance, Friday’s latest tick was at 103-10, but day-over-day changes are being calculated using 103-01.

We are working to resolve the issue.