MBS CLOSE: MARKETS SIT AND WAIT
Market's took a break from headline news today.
In average trading MBS was bid well as the stack outperformed the yield curve. Spreads closed tighter vs. TSYs and Swaps. FN 5.0s performed the best on relative value basis which is an indication that MBS investors are at least giving the "Homeowner Affordability and Stability Plan" a hint of respect. Towards "going out" levels TSYs did however begin to make up some ground on MBS.
FN30______________________________________
FN 4.0 -------->>>> -0-02 to 99-04 from 99-06
FN 4.5 -------->>>> -0-02 to 101-04 from 101-06
FN 5.0 -------->>>> +0-01 to 102-14 from 102-13
FN 5.5 -------->>>> +0-01 to 102-29 from 102-28
FN 6.0 -------->>>> +0-01 to 103-15 from 103-14
GN30_______________________________________
GN 4.0 -------->>>> -0-01 to 99-09 from 99-10
GN 4.5 -------->>>> +0-02 to 101-14 from 101-12
GN 5.0 -------->>>> +0-01 to 102-25 from 102-24
GN 5.5 -------->>>> +0-00 to 103-07 from 103-07
GN 6.0 -------->>>> +0-01 to 103-18 from 103-17
After spending the week at the mercy of stock's speculative sentiment..MBS is looking to make a name for itself again. THE DETAILS of the Obama Administration's Housing Plan have been released. After investigating the announcement, press releases, and FAQs know that underwriting guidelines have been noticeably relaxed and LLPAs have been logically reduced. Now we wait for the stars to align....
MBS is still hostage to THE BIG PICTURE. There are many issues yet to be addressed....
Who/what will be the government's next bail out? What else will the government have to guarantee? Is the pace of economic contraction slowing or picking up steam? What happens when we start recovering and the yield curve's slope gets steeper? Do we worry or not worry about inflation? Are we already in the grasp of a deflationary spiral of contracting aggregate demand and job losses? Should we continue to hide out in US Treasuries? Is the rest of the world in worse shape than we are? Will private equity ever return from hiding or will protectionism continue to hinder capital accumulation?
When it comes to the global economic and financial landscape, the extent to which we contract and the timing of a recovery are a complete unknown still. Many will make estimates but none will be more than a very educated guesstimate. All markets await MORE DETAILS on How Toxic Assets will be Handled....
So when approaching the path of interest rates from that perspective.....FTQ would continue to keep the yield curve relatively flat and MBS would still be stuck in the shadow of THE BIG PICTURE
Of course we cannot ignore the effects of government spending on the stack. At the height of "prepayment worries" in December and January the intensity of the "down in coupon" pace helped MBS buyers ignore the effects of the stock lever. The Fed was going to buy MBS and force mortgage rates lower...so the market assumed it would be a "refi party" and everyone was invited. For that short time MBS was insulated from the stock lever and relative value.
Once the market learned that the Fed's "refi party" was no fun unless all mortgage market participants showed up.....a lesson was learned. MBSstarted trading off new assumptions and market participants took on new...more agressive...strategies. Tactics that wreaked havoc on your rate sheets.
What Questions are Left to be Answered for MBS?
Well for starters.....will the Obama Housing Plan Be Effective FAST ENOUGH to keep the MBS market from getting impatient to the point that they move back "up in coupon" again?
On the bright side, as of today, MBS market participants are not venturing into the fuller side of the coupon stack...especially not after end of month prepayment data indicated more borrowers had refinanced than expected. What I am saying is "up in coupon" is once again..."ON HOLD" for MBS investors.....at least for now!!!! We still have a few issues to contend with....
Will Mortgage Insurance requirements be reformed? Will Mortgage Insurers get bail out money? Will the GSE's all switch over to an "FHA-esque" MI program? Will TALF rejuvenate securitized lending and consequently hurt MBS demand and mortgage rates? Will loan mods be effective enough to help slow asset depreciation and price deflation? Will 2nd lien holders cooperate with subordination requests? What lender's will allow correspondent and brokers to participate in DU Refi Plus? Will borrowers actively pursue a refinance? Will borrowers pursue the right TYPE OF REFINANCE?
MBS market participants are currently acting as if they have given REFI PLUS and DU REFI PLUS some level of respect. We however know that the "Stars must align" in order for rates to drop again. In order for the "stars to align" everyone needs to do their part.
We know the Fed will continue to support production coupons (4.5s and 5.0s). Loan officer's you need to do your best to EDUCATE borrowers on their options. Borrowers you need to get your loan file submitted for processing as soon as possible. Loan officers: when rates have a good day and lenders pass along lower rates to borrowers...get on the horn and contact your borrowers. Borrowers: stay in close contact with your loan officer.
For goodness sake...no one get greedy because the market is super competitive and rates are moving quick. "Up in Coupon" is only a mouse click away....
All we can do is our OUR PART (loan officers and borowers) while we wait for everyone else to "join the party"
Tomorrow begins the Class A Settlement Process.