MBS AFTERNOON: Interesting Paradox
Here's an Article from MarketWatch.
It speaks to some extent about the current sad state of banking stocks. As we've seen in the past, a moderate amount of weakness for stocks in general has tended to be of relative benefit to fixed income and MBS. However, when key players in the MBS market, some of which are the aforementioned large banks, are significantly weakened, it can have a detrimental impact on MBS. Moreover, during months like this where MBS becomes disconnected from mortgage rates, certain considerations for banks in the market transcend the MBS market. An example would be Chase's recent decision to pull out of wholesale and the TPO market. Whether things like this cause a positive or negative shake up for lender pricing can largely depend on the lender. Whatever the case, the more "instability" in the secondary market, the more potential for price volatility on rate sheets.
After the Fed both announced the timeframe, and actually stepped in and started buying MBS this year, we've seen probably the most stable trading ranges for MBS in recent memory. This is stability of one kind, but it is the "behind the scenes" instability that has continued to harm lender prices. So how are we to interpret backstops, bailouts, etc...? Are they good for MBS? Certainly history would indicate they are. But this may be one of those areas of the market where what's good for MBS may carry unforseen consequences for the primary mortgage market. And this is where the linked article above comes into play.
It's pretty simple really. Remember all the hullaballo about Frannie before the conservatorship was announced? The big debates centered on the act of government interventions damaging shareholders beyond repair. It was certainly a contributing factor to wider spreads between primary and secondary rates for the very central organizations of our industry to face increasing turmoil. With a new round of bailouts and the government's renewed vigor concerning propping up the banking industry, what is the unseen impact? Well, perhaps more seen by some than others. Whatever the case, it's not the kind of thing we'd normally be looking to for a correlation to rates. It's the same as with Frannie. If the government gets involved in a meaningful way, there can be a certain extent of shareholders being "wiped out," to use the cliche. And although a vote of government confidence can be good for MBS prices, the resulting capital degradation for MBS market participants can continue to exert contrary forces to all the positivity on the other side of the fence.
Just some "big picture" stuff to keep in mind as this epic drama unfolds...