MBS Update: Calling All Mortgage Professionals

DOWN IN COUPON IS THE THEME

So the Fed is buying. I guess Hank and Ben are friends of MBS again. For now at least that is....

COUPON STACK (after close trades included)

Fn 4.0-> +0-23+ to 100-03+

Fn 4.5-> +0-15+ to 101-16+

Fn 5.0-> +0-18 to 102-15+

Fn 5.5-> +0-11 to 102-25+

Fn 6.0-> +0-04+ to 103-12

Here is the trading activity on the "street level" 4.50 current coupon. Although the coupon that is trading closest to par is the 4.0 (100-03) this is not the coupon that represents the rates being offered on the street. (Read why later in the post)

The 4.5 is in the beginning stages of a long term upward trend. We are hoping for baby step buying at the worst. Meaning the Fed will continue to slowly inject small portions of "$500bn MBS Program" money into the system (which is what they did today). Whether or not this buying trend is a steep (quick) trip down in coupon (lower rates) or a slow meandering "testing of the water" depends on what we describe as the "bandwagon affect". Will speculators look to take advantage of cheaper MBS prices? Or will markets force the Fed to set the buying tone ? If speculators and riskier money  jump on the Fed buying MBS bandwagon PRIOR to any major Fed injections....then the market will naturally push rates lower without any substantial Fed monetary assistance. This plan would then require the Fed to provide MBS funds when "market conditions warrant" which would generate rate stability....similiar to the range we enjoyed in December when the Treasury ate up excess supply of MBS via open market purchases. We are not sure what strategy will be employed but we do know rates will be lower next month than they are now...

As expected the "question of the day" in the War Room has consistently been "do I lock now or wait for street level rate sheets to reach the mind-boggling 4.00 range?"

Fair question. Rates aren't as low as they should be right now....rates might not ever reach 3.75...but we believe they will go lower than current costs. We are long term floaters (at least until after the jan.13 settlement date). But why are rates not lower right now? The FN 4.0 is trading over par why cant we at least get 4.500???

For a better understanding read this article...Why are Rate Sheets Not More Aggressive????

The premium add on we are dealing with now is the "we can't handle any more business" rate add on...an explanation we have heard from more than one lender. It is a fair explanation on some level. Mortgage professionals think about this: how many of your peers are no longer working in the business? Have you been witness to the sad days when 10 year members of your support staff had to pack their desk's and vacant the premises? Sadly mortgage managers had to make some tough decisions but they had no choice but to strip down balance sheets in an effort to become quasi-nimble in the ever changing and evolving mortgage market. Budgeters looked to reduce all fixed costs: from receptionists to rolls of tape, from printer paper to processors it was an industry-wide purification process. So for the short term we deem it fair that the hibernating mortgage monster just needs a slap in the rear (Fed $500 bn injection) to snap out of the hibernation haze. If you are a jobless mortgage professional...you might want to start actively searching the want ads. We need your help...

Since the FN/FRE bailout, the mortgage world has slowly (anxiously) suffered through 3 months of speculation over government funding. Things are looking up (in MBS price)....rates have made "all time low" headlines several times in the past month. So as expected, anyone who is partial to cheap money is coming out of the bushes, consumers are showing more interest in a less expensive borrowing costs. Rates are at all time lows and the media is announcing it loudly...including Mortgage News Daily. RATES WILL GO LOWER RATES WILL GO LOWER RATES WILL GO LOWER. Shake the bushes people!!!

In the short term we expect Fed money to provide continued support, barring any tape bombs we cant find much reason to believe the the FN 4.5 will far too far below our "base camp" price level of 101-14. Any sell off that pushes MBS prices lower should not last long. Rally chasers and speculative supporters OR Fed money should find that "conditions warrant" buying and the bid will stabilize. Furthermore...once operations catch up with production, we are due some "de-cushioning" adjustments on rate sheets. Translation: another reason to believe rates will be lower in 30 days. Once again if you are a jobless mortgage professional we need you back: find your 12C and return to your post!!!

Borrowers: If you like paying less money for something....you have a huge incentive to call a banker or broker. See if you can lower your payment!!!

f you enjoy reading our commentary but have difficulty translating our jargon, try reading our MBS Basics and this article "How are Mortgage Rates Determined". Once you witness the educational and monetary benefits you wont regret it