MBS MORNING: Rate Sheet Considerations
The Federal Reserve was and remains the main source of liquidity for originators looking to find a willing buyer of their pipeline of loans (the loans you locked), although other market participants are beginning to aid the Fed's efforts as they lose their desire to ride the "up in coupon" duration roller coaster. (Duration Roller Coaster: because MBS market participants are having a such a hard time forecasting borrower refinance behavior...the value of fuller coupons like the 6.0 and 6.5 is much harder to determine and it can cause the relative value of "up in coupon" MBS positions to sway in a wide range...which makes it difficult to forecast cash flows and therefore profitability).
So far this morning MBS remains at the mercy of the "feelings" of TSY traders who are battling technical and fundamental obstacles on the road the lower rates. MBS spreads are currently tighter but will be anxiously awaiting the results of the 1pm Treasury auctioning of $24bn 7 year notes.
Most lenders are slightly worse today...if MBS continues to improve a "reprice for the better" is possible, however given the market's knee jerk reaction to the weak turnout after yesterday's UST5YR auction...it is safe to say that most lenders will remain defensive.
APRIL FN30_____________________________
FN 4.0 -------->>>> +0-04 to 100-07 from 100-03
FN 4.5 -------->>>> +0-04 to 101-26 from 101-22
FN 5.0 -------->>>> +0-01 to 102-25 from 102-24
FN 5.5 -------->>>> +0-03 to 103-17 from 103-14
FN 6.0 -------->>>> +0-00 to 104-07 from 104-07
APRIL GN30____________________________
GN 4.0 -------->>>> +0-03 to 100-11 from 100-08
GN 4.5 -------->>>> +0-02 to 101-28 from 101-26
GN 5.0 -------->>>> -0-01 to 103-08 from 103-09
GN 5.5 -------->>>> +0-03 to 103-26 from 103-23
GN 6.0 -------->>>> +0-01 to 104-10 from 104-09
Last week we saw another large increase in mortgage applications following Wednesday's surprise FOMC announcement of an additional $750bn for MBS and newly outlayed $300bn for TSYs...headline news read...****MORTGAGE RATES MARKEDLY LOWER*** and ***RECORD LOW MORTGAGE RATES***
After the announcement we witnessed loan officers operating at a panicked pace and mortgage banks scrambling to sell their pools of loans to the MBS market (this is how they protect their profits from interest rate risk). There is a specific reason I bring this up...because it relates to your rate sheets. It is painfully obvious that mortgage rates have become subject to many other factors besides the behavior of MBS. One of those incognito factors is pipeline management costs.
The surge in supply we have witnessed over the past week has some interesting implications for both the primary and secondary market. The secondary market, MBS trading, will view the increase in originator offerings as a sign of more prepayments to come and therefore an unanticipated loss of a cash flow in their portfolio. When this occurs MBS market participants will look to protect themselves from "prepay risk" using a variety of strategies...one of which is to avoid expensive MBS coupons which have a higher probability of being paid off in the near future...like 6.0s and 6.5s. This would imply that non-taxpayer funded accounts would provide increased competition in the market for production coupons....which leads me to your rate sheets. A diminishing "up in coupon" bias is indeed occurring because of increased mortgage applications (remember my soap box rant last Thursday?)...if the MBS market remains fearful of prepayment risk lenders will be more willing to pass along gains to your rate sheets and you will be a happier loan officer/borrower. YAY right?
Not necessarily. There are some contrary views one can take from the onslaught of originator selling that has occurred over the past week. Yes...mortgage applications definitely increased over the past week...but are those new applications all locked and heading towards closing in the next 30 days? Some may be locked in...but not all, and even then borrowers still face a gauntlet of obstacles before closing (qualifying without DU REFI PLUS regs is the first issue...you know about the host of other issues already). This leads us to the idea that mortgage bankers may have over committed themselves to the MBS market.
Remember: when mortgage banks/originators sell supply of loans to the MBS market they are committing to deliver a certain amount of loans to their buyer on settlement date...very similar to how you lock your loans. When you decide to lock in a rate....you aren't selling the loan THAT DAY...you are locking in your interest rate for 30 days and committing to send the closed loan package to the investor by a specified date.
Given the massive amount of loans that were committed for delivery by mortgage banks recently (Friday was a record day for supply) we are worried that perhaps lenders may have over committed themselves to the MBS market. This assumes that the majority of loans that were locked over the past week were not new applications and were instead borrowers who had previously submitted their loan package and decided to wait for mortgage rates to go lower. These borrowers should have been CTC pending a lock already, they are in good shape.
But what about all the new mortgage applicants who jumped off the fence after the FOMC announcement? Will lenders who are operating at full capacity be able to get those loans closed in time for April 8 notification day? Many borrowers will need to take advantage of the Obama Administration's new mortgage programs that are not expected to take effect until at least April 1...even then lenders will be slow to implement the programs. Furthermore what about all the other issues the mortgage market is dealing with at the moment? (Issues we are all well aware of right?)
That said...What if lenders are not able to fulfill their promises to deliver (mandatory commitments...not Best Efforts) the pools of loans they have already sold forward to the MBS market?
Well..two things could happen...
Lenders who are worried about not being able to deliver their committed loans could attempt to buy the market using aggressive rate sheets in hopes that they would have enough closed loans by settlement date. This would be nice for you...but unlikely considering they would still need to get new loans processed and closed by April 8. (Even if correspondent lenders are operating efficiently, mortgage bankers still have to clear stips and purchase loans in a hurry...a process that is improving but by no means 100% efficient.)
The other option is not so rate sheet friendly. Lenders could decide to "buy the roll" (READ MORE ABOUT THE ROLL HERE) instead. If this occurs there would be negative implications for rate sheets. Buying the roll implies lender's hedging costs will increase (most likely...depends on MBS and borrower behavior over the next month) . An additional cost that has been, and should continue to, be passed down to borrowers through rate sheets.
Plain and Simple: if lenders over committed themselves to the MBS market and they cannot deliver on settlement date...we will be in for continued periods of erratic pricing strategies that will leave you frustrated and weary of work.
For the time being we will be monitoring investor turn times and oddly aggressive reprices for the better (CFC yesterday). From an MBS market perspective we will be watching the "roll market" to see if lenders are showing signs that they prefer to deliver their pools of closed loans at the next month's settlement date. As always your input on the situation is appreciated....