MBS RECAP: Some Volatility Due to Holiday-Level Participation

By: Matthew Graham
MBS Live: MBS Afternoon Market Summary
MBS are heading out right in line with Friday's latest levels.  The day began well, and bond markets even made gains following the stronger-than-expected Industrial Production numbers.  Illiquidity into the noon hour left sellers in control and it didn't take much volume to sap all of the gains.

We've now entered the time of year where volume takes a noticeable hit due to holiday absences.  This is a legitimate factor in MBS markets where only a few absences among key players is enough to affect liquidity.  Whereas volume relates to the amount of dollars traded, liquidity is the amount of volume at any given price. 

When liquidity is thin, there could still be a decent amount of volume, but if buyers and sellers are far enough in price, that volume may never get traded.  Either that or one side of the trade has to jump farther to the other side than they otherwise would.  This causes those choppy 2-4/32nds jumps that--on most other days--would mean something significant had happened.  On a day as illiquid as today, it doesn't mean much at all.

Today also had the distinction of being the lowest volume day of the month.  This means it takes even fewer dollars making those 'illiquid jumps' to move quoted MBS Prices around.  Tomorrow may be a bit more active, but in general, the only thing markets are guaranteed to tune in for this week is the FOMC Announcement at 2pm on Wednesday.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
95-12 : -0-02
FNMA 3.5
99-24 : +0-00
FNMA 4.0
103-10 : +0-00
FNMA 4.5
106-05 : -0-02
GNMA 3.0
96-24 : +0-03
GNMA 3.5
101-03 : +0-03
GNMA 4.0
104-12 : +0-04
GNMA 4.5
106-29 : +0-04
FHLMC 3.0
95-04 : -0-02
FHLMC 3.5
99-18 : +0-00
FHLMC 4.0
103-03 : +0-00
FHLMC 4.5
106-01 : -0-01
Pricing as of 4:06 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

12:40PM  :  ALERT ISSUED: MBS Back Near Unchanged Levels; Negative Reprice Risk Increasing
Black box selling in Treasury futures is led Treasuries to their weakest levels of the day just now. MBS are doing their best to keep up with the move despite what continues to be generally poor liquidity. All that to say, there is no overt headline-related reason for the current selling.

Lack of causality aside, the losses are enough that some lenders who priced near the earlier highs (930-1030am) could be considering a negative reprice risk. Fannie 4.0s are now down to 103-11 from 101-17. 10yr yields are at their highs of the day at 2.879.
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.

Jason Anker  :  "Michael is correct. you can use 18 months avg over 24 months"
Andrew Russell  :  "http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/41551HSGH.pdf"
Mario Ingraffia  :  "@michael any insight where i'd find this in seller guide? Our u/w are stating that they will allow if I can provide where Ginnie mae excepts this. "
Michael Gannon  :  "You will need the tax returns for 2012 and 2013, but per the guidelines you can use between 1 and 2 years if you can document the likelihood that the income will continue and soundly rationalize accepting the commission income"
Chip Harris  :  "Just had a customer call a LO saying they heard about a new program offering discounts to borrowers over 45. Seems like discrimination to me."
Mario Ingraffia  :  "Question: FHA loan for a borrower whom was a student prior but has been at a job for 18 that has commission, Anyone know where in the seller guide if at all it states we can average his commission over 24 months to qualify?"
Ira Selwin  :  "Interesting article in the newstream about comments on decrease of future loan limits."
Brian McFarlane  :  "Typically distributions are non-taxable events as it serves to reduce the basis. If the distribution exceeds the basis, it is then reported on Schedule D and you have to pay taxes on it."
Eric Sayer  :  "JB, I'd have to agree with Hugh and Caroline on this one. Never had an instance where Distributions can count as income. Only Ordinary Income or Guaranteed Payments can be used. "
Brian McFarlane  :  "If the distribution is reported on schedule D, then you can possible use it, if there is a history of the distribution and the capital account of the partnership supports the distribution. If it is not on Sched D, then no go."
Hugh W. Page  :  "And, a "distribution" is a withdrawal of equity. It's not recurring cash flow."
Hugh W. Page  :  "If you look at a a SE Cash Flow Worksheet it indicates you can use income from Lines 1,2,3, or 4 on the K1's. Doesn't say anything about Box 19"
Joe Bydzovsky  :  "This one is also a partnership.. 50/50 ownership. Box 1 is a small loss, box 19 is distribution. Box L completed with "Partner's Capital Account Analysis". "
Caroline Roy  :  "k1's yes, but distributions do not come through on the income boxes, they are at the bottom and are not considered income."
Ted Rood  :  "Just did one on a jumbo refi, JB, don't see why not if a 2 year history."
Joe Bydzovsky  :  "Can distributions on a K1 (box 19) ever be used for income on a conventional purchase? The borrower does not pay himself a salary, but has distributions. "

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