You might notice the title of today's MBS CLOSE doesn't include "MBS CLOSE."  Considering AQ's afternoon commentary pretty much covers it for today and that there is not much to share beyond the normal "technical trading within a range" theme, we still wanted to get you some content this evening.  This coincides with us finding a hopefully thought provoking piece on our shelves that would otherwise be collecting dust.  AQ and I put the following article together for a trade publication and have since decided to go with something that has fewer question marks.  This, on the other hand is more of an effort to get the industry thinking about the implications of impending changes in the industry. 

As far as any lingering questions on the MBS CLOSE, prices persisted in a range around 100-18/100-19 all afternoon and ended right there.  Stocks rallied moderately.  The 10yr improved 10 ticks bringing the yield to 3.45.  Everything remains smack dab in the middle of recent ranges (except stocks of course, which continue to push higher) ahead of tomorrow's FOMC announcement and continuing tsy auction schedule.  So again, we have risk concentrated AFTER rates are released.  If a given lender has been historically pre-disposed to price as normal on such mornings and adjust as necessary, this obviously creates a decent overnight float opportunity.  But the more common eventuality, and indeed how we'd set our rate sheets, would be to bake in a bit of concession for the potential volatility beginning at 1pm with the auction and 2:15pm with the Fed.  The good news either way is that even subtracting out the time to write and publish, we should be able to keep you well ahead of any reprices, as always.

Without more ado, here's the first half of the article.  The bottom line message is that there are still many components of the overall mortgage market that HAVE NOT shown proportional signs of improvement to the gains seen in sentiment indicators and stock prices.  In other words, as the overall economic health is restored, what about our primary/secondary spread, HVCC, underwriting stringency, program availability, turn times, etc...?  The masses have a tendency to drive stock prices higher and consider the economy recovered at a much faster pace than normalcy can be restored to the NON MBS PRICE RELATED components of the mortgage market.  And all this at a time where the Fed will be exiting the scene and Fannie/Freddie, AT BEST, can't be relied on to fill the shoes and at worst might even be restructuring.  The goal is to stimulate thought and action.  With that in mind, you are more encouraged than normal to share any thoughts in the comments section below.  We might even be off base!  Either way, let us know!

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From the onset of panic and catastrophic loss to the resulting intervention and stimulus, the mortgage market played a starring role in nearly every act of the crisis... until now... 

With growing evidence of a recovery, the worst of the panic is subsiding and the mortgage world's 15 minutes of fame are almost up.  But if the mortgage market was so integral to the creation of and response to the crisis, how can we truly be working in the best interest of the recovery until both its new and lingering problems are more adequately addressed?

In a way, one of the aspects of our salvation is shaping up to be an unintentional curse: LOW RATES.  It's not because low rates CAUSE something negative to happen (although lock fallout and capicity related issues certainly aren't fun).  The bigger issue is what low rates have PREVENTED.  Getting rates into the 4's accomplished one of the most tangible intervention goals.  Several speeches during and leading up to various intervention efforts went so far as to mention those sorts of specific rate levels.  Now that they've been attained, there is a dangerous tendency to consider the mortgage market "fixed."  And whether it's because of that perception or just an overreliance on rates as a barometer of mortgage market health, old and new problems alike are not getting the attention they deserve.

What kinds of problems, you ask?  Just looking at ONE hypothetical transaction, we see several.. 

Low rates probably don't do much good to John Doe, who thought he had an 80% LTV until his new appraisal, whether due to HVCC-related distortion or the foreclosure problem in their neighborhood, showed their LTV to be more like 100%.  Even after the disappearance of some of the more infamous Alt-A products, 100% might have worked just fine for him considering he doesn't need cash out (read: limited ethical concerns).  But if it's not UW guidelines or HVCC, it's the changing MI limits.  Even if he tries to get around the MI and just get a new 2nd he finds there are no more 2nds for him...  No problem right?!  He could just re-subordinate his current 2nd!  Sorry... it looks like his current note-holder isn't doing resubs or at least not in the timeframe needed.  You get the idea...   

But that's just a microscopic view at the various "hurdles" that ALREADY exist...  What about the arguably more important potential problems on the horizon?"  Perhaps the biggest problem ahead relates to the secondary mortgage market, and far from being an isolated annoyance in a hypothetical scenario, this one affects the entire sector.  What's broad enough to affect the entire sector?  In a word: liquidity.  From its inception, the secondary market has been driven by and cannot healthfully survive with out liquidity.  But before the Fed announced the MBS purchase program, indeed, all hope of preserving what little liquidity remained, let alone RESTORING it, may have been lost.  Week after week we watched as MBS spreads to treasuries moved higher and higher. 

The situation was so bad that even the Fannie/Freddie Backstop-- At the time, perceived as one of the last bullets in the government's arsenal--turned out to be more of a speedbump.  After an initially positive reaction, MBS premiums to their treasury benchmarks resumed their march toward oblivion.  The writing was on the wall...  The only way MBS could find a buyer was to get relentlessly cheaper compared to treasuries.  Demise was imminent.

Enter the Fed and the results are staggering.  Spreads moved from their all time worst levels not only to historically normal levels, but much closer to their all time best levels.  Rates plummetted in anticipation before the buying even begin, but it's truly uncanny to look at the absolute PEAK of MBS Spreads occur 1 week before the fed started buying and then to observe spreads drop dramatically and continually until hovering now around all time tights.

In short, after numerous attempts at resuscitation, MBS not only had a pulse, but a new lease on life altogether.  And though no one can say for sure what will happen after the Fed has completed their scheduled purchases in the MBS market, one thing is clear: the lease is up.  Best case: enough has been accomplished for the MBS market to stand on its own again.  Worst case: when the Fed leaves, so does the liquidity, and what's to stop a repeat of the "not good enough" vote after the conservatorship.

Pinpointing the fate of the secondary market on that spectrum would be much easier if more clarity surrounded the fate of the GSE's.  Fannie and Freddie would be the obvious candidates for liquidity considering that they've more or less filled that role since before it existed.  But far from being in a position to pick up any slack, they are in fact mandated to DECREASE their stimulus-inflated MBS holdings in the new year.  Uh oh...

So we have our rich Uncle Ben finally heading back home after helping us get back on our feet in grand fashion.  This leaves us with only Aunt Frannie and Uncle Freddie still in town in case of emergency.  And even if they prove to be more willing to help the next time we hit a snag, it looks like their bankroll will be getting progressively smaller.  The confluence of these events creates one universal certainty: UNCERTAINTY.  In other words, even if nothing inherently bad is to come of the changing landscape of the secondary market, the fact that IT MIGHT, in and of itself, is a negative.

That uncertainty combined with the incredible scope  of the changes SHOULD make more than just the MBA and the GAO stand up and take notice.  But so far...  Not so much... 

-MG and AQ

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We have our ideas (and even blueprints?) on saving the industry (if it needs saving), but what are YOURS?!?