We want to address something that we see as a danger to the mission. Let's use the current real world analogy of the Obama campaign. It was mentioned recently in one of our favorite publications that the concepts of "hope" and "change" had taken such an idealogical and quintessential hold in the campaign that the incoming administration would have to be careful to manage the potentially overblown expectations of the constituency. The analogous situation taking shape among our readers is not dissimilar, and accordingly, it's time to manage expectations
Tomorrow brings us the final day of Class A settlement, in which sellers of MBS deliver the loans in pools to satisfy the executed sale trades made over the last 3 months. When this occurs, sellers will finally receive payment for the most action-packed month of originations in recent memory. Up until now, the cost to originate these loans has been borne by MBS sellers, aka originators. We have surmised that one of the several components that is causing a much-larger-than-welcome margin of MBS prices to lenders' rate sheets is the funding constraint created by the gradual exhaustion of money to satisfy a rapidly increasing originationd demand. As this money has dried up, it stands to reason that lenders must artificially raise rates to deter incoming business in order to avoid exceeding their funding sources.
With the passing of settlement, these funding lines will be replenished. It is with this concept in mind that we have discussed the probability that primary vs. secondary spreads would have a significant impediment to tightening removed after the 13th of this month. After fielding questions today on blog comments and moreover on our daily MBSLive War Room training, it is this concept which seems to have been "latched-onto" by our devotees as some glorious and all important "switch" that will magically improve rate sheets overnight. In the same way that the "blind faithful" among Obama supporters may be let down when they wake up on January 21st and realize that the simple inauguration of the man did not, in fact, bring about a sweeping, quintessential "change," some of you may wake up tomorrow to realize that the January Settlement did not, in fact, bring about a sweeping, quintessential spread tightening and improvement in lender rates.
All things being equal (especially in terms of MBS prices), the passing of January settlement, will ALLOW the normal market force of competition between lenders to behave that much closer to normal. If lenders once again have money to originate loans, they will be able to more aggressively lower rates and/or increase YSP in order to maintain their nominally full pipelines as other lenders become more aggressive as well. This DOES NOT occur overnight and it IS NOT a "flick of a switch." It is but the first day of a gradual process that is not only interdependent with other factors, but will also take months to occur. Will rate sheet spreads to MBS now begin to improve? We think so. We'll even go to the trouble of archiving some historical spreads from several lenders to track the changes. As that occurs, we'd ask you to keep in mind that this is the MBS BLOG, not the "investigate and report on the various considerations impacting every lenders' primary vs. secondary spreads blog."
We've been perplexed to continually hit the nail on the head in terms of MBS price changes yet encounter what we perceive as frustration that their particular lender did not price in the same direction as MBS movement. This is especially confounding when OTHER lenders did, in fact, price with MBS movement. The fact of the matter is that we simply cannot account for every lenders' numerous considerations in constructing their rate sheets. We've delved, perhaps presumptuously, into the arena of specific lender business flow considerations in order to rapidly and nimbly adapt to a violently changing market landscape. Without saying "this was done as a courtesy to go above and beyond for our readers," this was done as a courtesy to go above and beyond for our readers. We're very concerned that many of you seem to have interpreted our analysis of the settlement as a magical event that will instantly tighten these spreads. Though it will likely mark the turning point and/or inception of that process, a magical event, it is not.
So as we continue to give lenders time to do what they need to do to improve pricing, including increasing staffing, replenishing funding lines, and gradually allowing the frontrunning competition to take risks and soak up demand, we ask that you have a similar measure of patience. The last thing we want is for you to expect a dramatic change in rates tomorrow and not get it. Some of you will, some of you won't. But most of us will realize most of the anticipated gains STARTING tomomorrow. As far as how long it will take for this to run it's course, we don't know. So we will take a look at a few lenders rates vs. MBS prices over the rest of the week and compare it to the first week and a half of January. Again, our prediction is that the spreads between MBS and YSP will begin to tighten. But please, DO NOT assume that YSP will start falling from the heavens in buckets tomorrow. Look for a trickle to start, and manage your expectations accordingly.
In other news, we are nearing completion of a very important and complicated concept of "dollar rolls" that we are trying to make sure "makes sense" before inundating you with potentially confusing information. This should be done either later tonight or tomorrow, and will further add to the knowledge base. Not only are we committed to taking MBS education to higher and higher levels for mortgage professionals, but we enjoy it. As we get into ever more esoteric concepts, it is important to make sure you understand exactly what is being discussed before allowing new concepts to have a higher-than-justified impact on your lock strategy. Enough with the austerity... MBS remain near all time highs. So we will sign off and see you tomorrow to watch and wait for the good things we know or on the horizon.
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