MBS Live Day Ahead: Investment Property Hit Stealing The Show as Bonds Stay Sideways

By: Matthew Graham •

Yesterday's much-anticipated 10yr auction was extremely underwhelming.  Combine that with fairly flat trading levels at the moment and the mortgage community is free to devote most of its focus to the newest hot topic of lender-specific hits on investment and 2nd homes.

If you missed it yesterday, HERE is what initially prompted the drama.  Or for those who didn't click the word "here" in the previous sentence:

  • In the final days of the Trump administration, Treasury amended the GSEs stock repurchase agreements to limit non-owner and 2nd homes to 7% of Fannie and Freddie's portfolio
  • The most important part of the link says that GSEs will monitor deliveries from investors  and "working with" those that have excessive delivery volume. 

Translation: GSEs will warn lenders that excessive loans (more than 7% NOO/2nd) cannot be purchased. The net effect is that lenders who are anywhere close to 7% currently (and especially those over 7%) will be implementing substantial hits for NOO/2nd so as to keep their total delivery proportion to the agencies under 7%.  

NOTE: Apparently the current proportion of deliveries across all lenders is currently roughly in line with 7%.  That means there doesn't need to be a huge impact on pricing by the time all is said and done, but in order to achieve that, there WOULD need to be quite a bit of reallocation from lenders with more NOO/2nds to those with less.  Lender-specific LLPAs will be elevated in the meantime.  Also, we should assume many lenders will want to avoid getting too close to 7%, so we should also expect the end-of-day net effect to be elevated NOO/2nd home LLPAs on average.

The 30yr bond auction at 1pm could still have an impact.  Consider that we had a "merely average" 10yr result yesterday after a very strong 3yr result the day before.  This speaks to better demand for shorter-dated bonds and thus a "steeper" yield curve (the fashionable trade of the past 6 months).  Investors could thus understandably be hesitant about more weakness in the long-end at today's auction (i.e. 30yr bonds are even longer-dated than 10yr notes, so if there is a steepening trend being traded this week, this afternoon's auction will be the most challenging.  Pushing yields higher ahead of the auction makes it "less challenging," relatively.  And indeed we are seeing 30yr bond yields leading this morning's weakness by a wide margin).