MBS UPDATE: So Much To Say
My ears hurt after all the alert alarms we had to sound throughout the session! Here is a summary of the intraday price action...OPEN: up up up down sideways sideways down down down sideways sideways down down CLOSE...then down some more in after hours trading. :-)
Ok here is the real summary....
Fn 4.0-> -0-14 to 99-30 Gn 4.0-> -0-06 at 100-18
Fn 4.5-> -0-11 to 101-06 Gn 4.5-> -0-14 to 101-07
Fn 5.0-> -0-09 to 102-00 Gn 5.0-> -0-10 to 102-07
Fn 5.5-> -0-06 to 102-19 Gn 5.5-> -0-07 to 102-21
Fn 6.0-> -0-07 to 103-05 Gn 6.0-> -0-11 to 102-30
The Fed remained a buyer early in the session, their efforts combined with light trading flows help carry on the down in coupon rally we thoroughly enjoyed yesterday. When rate sheets began to pour into our inboxes this AM we were cheered on by the fact that our sample/preferred investors had decided to pass along moderate price improvements. We were pleased because some little birdies had previously shared some interesting information with us. LENDERS ARE STILL MODERATING PRODUCTION WITH HIGHER RATES!!! SURPRISE!!!! (Please note sarcasm). Yes, it is no shocker that turn times are still lengthy and mortgage banks are still bogged down with 15 day old files. BUT there is hope...word on the street is the big boys are building their operational infrastructures. So at some point, barring any tape bombs like BK judges modifying mortgages (more to come on that) the road to rate reductions is being paved with new processors, underwriters, and closers. Patience. Woooo saaaaaah woooo saaah. That is what I tell myself after a 15 tick rally and a 5 bps rate sheet adjustment. If that doesn't help get a Zen rock garden.
But then it happened...our sell off siren started screeching. The assumption we made about intensified loan locking yesterday turned out to be accurate. You loan officers must have heard our reprice announcements because originators (mortgage companies) started selling early in the afternoon. This is a normal function of the MBS market though, mortgage companies use the TO BE ANNOUNCED MBS market to sell forward a commitment of MBS...this provides protection from interest rate risk and fosters lower rates by adding liquidity to the mortgage market. Anyway the originator profit protecting combined with an ongoing day trading atmosphere did not mingle well with the light/below normal trading activity. The lack of liquidity rapidly deteriorated willing buyer's bids...but you should take some solace in the fact that the extent to which bids worsened was exaggerated by the lack of willing buyers. Does that help explain the up up down down sideways down down down trading range and consequential reprice parade? BTW if you didn't notice that MBS price moved every which way today.... you may have noted that one lender actually repriced 4 times. 4 TIMES IN ONE DAY!!! Working that lock desk must be fun/hectic...anyway we had several "thank you" emails for the timely reprice alert so it looks like a portion of our reader base was able to do some profit taking of their own before lenders punished your prices.
If you're looking for a scapegoat to take out your MBS frustrations on...look no further than the Federal Open Market Committee (no dont do that we love the Fed right now). The anticipation of a new FOMC policy statement drained MBS market liquidity (plus there is that unknown MBS prepay variable and a compressed coupon stack). That kinda stinks...there wasn't much reason to be nervous about what the Fed might say. Remember the Federal Reserve is essentially giving away funds (reserves) so monetary policy wasn't a big concern. The MBS Purchase Program has done its job (even though lenders couldn't keep up) and we didn't expect the Fed to "step on their toes" in their effort to push credit down the supply chain to consumers...so there wasn't reason to worry about that either. The one indefinite was new verbiage about our government purchasing its own debt. Well 2:15 came and went and all we heard was an an echo from last months statement.
In regards to the MBS Purchase Program the Fed stated that they continue "to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets" and the committee "stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant". Yay the Fed will do whatever is necessary to support us. High Five Mortgage World! Then we got a little teeny tiny morsel about the possibility of Fed purchases of US Treasury Bonds.... the FOMC stated that they are "prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets". The word PREPARED is the added expression. Well THAT DOESN'T TELL US MUCH and only makes us think that the US government is going to be issuing a ton more debt to pay for stimulus packages and "Bad Banks"..so Treasuries sold off after the statement which also contributed to the MBS markets fall from yesterdays glory. The main point you should take from today's FOMC statement: government intervention is a necessity and the Fed knows it...they wont slow spending until jobs are being created and everyone is worrying about inflation. Done.
In other news...
The democratically dominated Congress passed President Obama's $819,000,000,000 Stimulus Package/Plan today. Read more by CLICKING ON ME
I have been resisting the urge to ignite this debate in hopes that the issue wouldn't make it as far as it has... Yesterday a House Committee approved the "Cram Down" provision. This measure would allow bankruptcy judges to modify the mortgages of troubled homeowners...which would include the ability to cut down principal. Well some believe this would push mortgage rates up as much as 2%, others say that number is malarkey. Hopefully in the time you have spent reading our blog you are aware of how MBS investor cash flows work...if not I will elaborate further on THAT subject when I elaborate further on THIS subject. For now read these three stories for some knowledge base and we will further discuss tomorrow...as a group!
What is Adam talking about....READ ME
Why shouldn't I be worried....READ ME
Why should I be worried.....READ ME