The industry is all aflutter with Fannie and Freddie News.  EVERYONE, it seems, has an opinion.  Many of these opinions are loudest proffered by tiny, fury, little hamster-like cuties otherwise known as lemmings.  There was certainly a mass dash to the cliffs last week.  Some of the more free thinking lemmings stuck their heads up to look behind them and noticed that nothing, in fact, was chasing them.  They also noticed a crowd of onlookers pointing and laughing as one by one, they jumped off the cliffs. 

Rather than extend the metaphor, let's just leave it at this from today's Asset Securitization Report:

"In a report released this morning by Barclays Capital, analysts noted that the two GSEs combined have over a $1 trillion in unencumbered securities. The analysts added that this measure alone should "put to rest any worries about rollover risk in the near term."

Sure!  If you assume that the trillions of dollars of mortgage debt insured by Fannie and Freddie would be a total loss, things look pretty bleak, but even under the gloomiest of doomsday scenarios, less than 10% of that debt would default, and even then, there are no 100% losses.  In the worst cases, pools of defaulting loans are sold for around 30 cents on the dollar, not to mention to portions of those loans that must be born by the originating lender, and the investor.  All in all, Fannie is hardly ever losing more than 50 cents on the dollar on those bad loans.

So we have less than 10% default rate (around 3% right now!), and let's aggressively assume a 50 cents on the dollar loss on those.  Looks like about 1.5% right now.  Don't get me wrong, this would still be a HUGE number monetarily speaking, but it isn't exactly the 7 headed monster that the lemmings think they're running from.

It will be interesting to see if the GSE's even take the fed up on their offer of the discount window...

To frost this cake, numerous analysts are out this morning saying that FNM and FRE would have to lose about 40 billion to inhibit their operations.  This is FOUR TIMES worse than forecasts!!!!!! 

The Numbers:

6.0% FNMA is even at 101-14

5.5% FNMA is down 4 ticks at 99-00

Both of these are much better than Yesterday morning's levels, but not quite as good as the highs.  Day over day, pricing should be level according to MBS, but some lenders may have hedged due to morning uncertainty.

The News:

  •     FHLMC Auction. 
    • Freddie had a securities auction which was scheduled well before the mess, so it promised to be a very good insight to the magnitude of the situation.  In general, we have seen media and equities traders react wildly to the FN/FRE new, but NOT bond traders!  Sure, there was plenty of position taking on Friday, but the spreads between MBS and treasury didn't do anything remotely close to justifying the panic.  What do they know that the rest of the market doesn't?  Well, a lot really.  Just one of the considerations is that an MBS trade is going to be in the millions of dollars on average whereas John Doe can log onto e-trade and short the crap out of Fannie.  So who would you rather get clues from?  Today's Freddie auction provided more clues.
    • It was bid BETTER than their previous auction!
    • on 3 and 6 month bonds, the bid to cover ratio rose over 1% for each issue!
    • Needless to say, Freddie is "killin' it" today on MBS price.  6.0 Freddies are up 4 ticks on Fannies.
  • There was no other relevant scheduled release for today.  The market is driven by the FN/FRE events. 
  • Stocks Opened higher by a hundred points in the Dow, but have since returned near unchanged.
  • Spreads are hanging in there with MBS giving up a scant 3ticks on Treasuries. 
  • Spreads remain wide, setting the stage for a friendly MBS environment compared to treasuries
Lock/Float Conclusion:
  • Vigilance: Medium

Clock out, take a nap.  Do what you need to do.  When you get back into the office later today, rates should be better again.   OK, I exaggerate slightly.  Do not, in fact, tune out.  The moral of the story is that lenders are comfortably hedged for a volatile day, and as it continues to prove to be anything but, we may get some price improvements.   With spreads wide, and much of the recent action attributable to panic, the environment is looking good for MBS compared to treasuries (still).  We saw this two weeks ago.  MBS had a killer week last week, but after the drama, we're back out to higher spread levels.  With each passing day where Drama is not as pervasive, there is more and more room for tightening. 

We're at the highs of the day currently, with 6.0's up 9 ticks Day over Day and over HALF A POINT from "going out" levels on Friday.  All signs point to float for the rest of the day.  This should be reassessed before your lock cut-off.  If lenders have given us enough of their price benefit, locking might feel like a very safe bet to some of us that saw the sky fall on Friday.