MBS RECAP: Major Sell-Off In And Of Itself, Yet Still Much Higher Than Before QE3

MBS Pricing Snapshot

Fannie 3.0s are toeing the line at 104-00 currently, their lowest levels since 11am. This is more of a heads up than an out-and-out reprice alert, but this could vary depending on the lender. In terms of price levels vs rate sheet generation time, negative reprices aren't justified, but on a Friday afternoon with potentially high lock volume, the gentle downtrend of the past two hours may be enough to tip the scales. The more we dip below 104, the more those risks develop.

The moves are purely flow-based and not the result of any recent headlines. So there are no fundamental shifts occurring and no events pulling MBS down other than illiquid conditions at the end of a busy day.

To help lenders more efficiently reach an even broader base of eligible borrowers, Fannie Mae is announcing a number of enhancements to the underwriting and documentation policies for Refi Plus (manual only) and DU Refi Plus mortgage loans including:

• Reducing representations and warranties
• Providing an alternative to income verification for Refi Plus loans with payment changes less than or equal to 20%
• Reducing documentation for income and assets
• Providing an alternative qualification method when removing a borrower
• Clarifying use of Hardest Hit Fund programs
• Removing requirement for Single-Family Comparable Rental Schedule (Form 1007) for investment properties

Perhaps it would be better to say that Friday afternoon LACK of volume has kicked in as the recent hours have looked much like any other Friday PM. Since experiencing the steep adjustment into the 10am hour, everything has been relatively stable for production MBS with Fannie 3.0s riding a slightly positive trendline from the 103-28 lows to 104-07 currently. 10's haven't backed off their highs quite as much as we'd like but are currently at or under a moderately important pivot point around 1.86. Stocks are at their lowest levels since the cash open at 9:30.

Many lender's rate sheets remained aggressive enough that we wouldn't expect a positive reprice on the current level of stability, but we might not be that far off in other cases. If it were any other day but a Friday, we'd probably expect more, especially among lenders who released their first rate sheet after 10am Eastern. Bottom line, it's possible, but we wouldn't necessarily hold out for it. We'd also stay guarded against the "usual suspects" with respect to pipeline control reprices.

While the losses mentioned in the latest alert are still sufficient for a few earlier lenders to be repricing for the worse, actual MBS prices seem to have found their footing just under 104-00. 10yr yields rose 1.892 briefly and bounced several times in high volume near those levels before gently inching back down to 1.85's.

We're not especially convinced that we're "out of the woods" yet with respect to further weakness today and are just waiting to see how it plays out. As far as the day's weakest levels just after 10am, all we can say is "so far so good" in terms of defending them. We'll update you if they're threatened again.