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by Adam Quinones

MBS UPDATE: NOT PRICE UPDATE!!!

Jan 30 2009, 7:27PM

3PM MARKS

FN30_______________________ GN30__________________________

FN 4.0 -------->>>> +0-07 to 99-09 GN 4.0 -------->>>> +0-02 to 99-13

FN 4.5 -------->>>> +0-06 to 100-21 GN 4.5 -------->>>> +0-09 to 100-25

FN 5.0 -------->>>> +0-06 to 101-21 GN 5.0 -------->>>> +0-05 to 101-28

FN 5.5 -------->>>> +0-05 to 102-10 GN 5.5 -------->>>> +0-07 to 102-15

FN 6.0 -------->>>> +0-00 to 103-01 GN 6.0 -------->>>> +0-10 to 102-31

NEWS____________________________________________________________________________________________________________

THE BEA REPORTS THAT ADVANCE Q4 "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.

(PRESS RELEASE)

Consensus: -5.5%

Actual: -3.8%

Excluding Inventories: -5.1%

THIS JUST IN...Our economy did crappy in the fourth quarter!!!!! Everyone panic....this was the biggest output deterioration since 1982 (according to Bloomberg). Haha sorry the wretched reports are just expected at this point...thought I might have a little fun with the whole "foulness" of the economy. Did you notice the data was better than expected and the Dow still sold off? Market participants did indeed fade the press release.... this was just advance data and the BEA reminded that..."the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency. In terms of the effects on MBS.... contracting economic activity.....down trending aggregate demand.....falling home/asset values....to ALL OF THAT negativity...I respond with this:

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets"

The Fed is here. They are here to stay. Until at least end of 2Q '09....and even then they "stand ready to expand" (that means THEY WILL BUUUY MOOOOORE MBS IF NECESSARY!!!!!)<-------yelling. We know rates have gotten worse lately, but we also know lenders have been hiring. We know they are training and we know there are still lenders issuing aggressive rate sheets (the richest rate sheet requires the most pristine of files.) Unfortunately many of you are exposed to rates with "juiced in" bank margins and management haircuts. So the herd is generally down in the dumps (with good reason)...your rates have incrementally risen over the past 10 sessions...but then again so has the yield curve. PLUS the past couple days have been a roller coaster ride... so in general everyone is a feeling a bit worn out from that as well. Remember the MBS cheat code? (UP Up up down doWN dOWN DOWN SIDEWAYS SIDEWAYS DOWN DOWN DOWN).

Naturally this leads us to the big concern/issue/hullabaloo....WILL THE REFI BOOM EVER HAPPEN????????

Ok. I am going to go out on a limb and pull out the old crystal ball again.

DEEEEEEEEEEP INNNNNHAAAAALEEE. HOOOLD IT. EXHALLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLEEE

YES I TRULY BELIEVE THE REFI BOOM IS REALLY GOING TO HAPPEN!

One Simple Reason.....

Remember: $430bn more dollars will be spent on MBS in the next 5 months and that doesnt even include what the GSEs and Treasury Department are expected to purchase.

Well yesterday we found out that.... in the last weekly MBS purchase report the Federal Reserve completed $16.836bn MBS transactions. Of that $16.8bn they spent $7.190bn on Fannie Mae MBS. 42.71% of that $7.19bn bought FN 5.5s ($3.07bn).

Two questions arose from this statement.

1.WHY IS THE FED BUYING LESS AND LESS MBS?????

AND

2. IF THE FED IS TRYING "TO PROMOTE THE RESUMPTION OF SUSTAINABLE ECONOMIC GROWTH"....WHY ARE THEY BUYING UP IN COUPON???? WHY SO MANY FN 5.5MBS LAST WEEK????

No really we are asking you to tell us....I wrote the answer out already. We want to hear your theories. Don't be shy. No worries MBS are a complex topic...different answers only add perspective!

THIS IS NOT HOMEWORK. JUST AN INDUSTRY ACTIVITY. REALLY.... DON'T BE SHY!!!

P.S: HINTS

HINT # 1...

HINT # 2....

Hint #3

Relative Value. Relative value is a method of determining the attractiveness of an asset in terms of its risk and return compared to another asset's risk and return. In the MBS world we determine relative value by comparing the yield of a specific MBS coupon to the yield of the risk free benchmark Treasury security of similar maturity. This comparison is made by subtracting the yield of a Treasury security from the yield of an MBS coupon. In our writing these comparisons are stated when we refer to "spreads". You have read terms such as "spread tightening" or "wider spreads".... I like to say ""gappy" or "gapped out".

Hint # 4....

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Chris LeBarton

Is it possible they don't want to drive the rates down too quickly? Are they firmly aware of the backlog with lenders right now? I'd assume so, but maybe not.

Dean Gorenflo

Here's a little gem that though it may not have caused the up-tick, it certainly didn't help: MOSCOW (Dow Jones)--Russia's central bank no longer holds bonds issued by U.S. lenders Fannie May (FNM) and Freddie Mac (FRE), the Interfax news agency cited Chairman Sergei Ignatyev as saying Friday. "We've sold them, there's nothing left," Ignatyev said. "We didn't lose anything - we made a profit." The central bank had held as much as $100 billion in Fannie and Freddie debt at one stage, but had been gradually reducing its exposure. Link here: http://online.wsj.com/article/BT-CO-20090130-706184.html?mod=wsjcrmain

Bill Larson

I have had conversations with some of my reps (SPM) for example and they have confirmed that they are using the rate sheets to manage there pipeline and inflow of new locks as they staff up. I have been encouraged to keep submitting my files anyway eventhough the rate i need is not on the rate sheet right now. I guess if there was any question of weather there will be a refi boom or not could be answered by considering the fact Banks would not be staffing up if they think rates are going to stay were they are at now. My 2 cents

Peter Freely

"well below 4%" is what Fannie publically stated.

David Thompson

We are no more than 2 horrible jobs reports away from offering a client 4.5% 30 year locked for 45 days making 1.5 ysp. Last time this happened even the 10 year was trading(not closing) under 2%. My gut tells me that safety (treasury) will lead the Q1 parade and MBS will go along for the ride. I say a horrible jobs report(>750k including revisions) on the Feb and March 6th reports will lead Treasury yields lower. We'll see slow but steady rate decrease in MBS as more cash flows in attracted by higher yields. None of this will happen without Treasuries going down first. This will absolutely happen by the end of March, which allows time for staffing and capacity issues. Thats my story and I'm stickin to it.

Brian Brady

"WHY ARE THEY BUYING SO MANY FN 5.5MB????" They want to take the riskier coupons out of the equation.. 5, 4.5, and 4's are going to have much longer prepayment speeds than the 5.5s. If the Fed can all but retire the 5.5s, they make the lower coupons look more attractive.

Dean Gorenflo

Interesting story David. I don't arbitrarily poke holes in others ideas, but I am going to lob a dart at this one. Though negative economic information generally raises treasuries and MBS, isn't there a point when investors say "hey, can they even pay these mortgages back despite the low rates?" Isn't there a point that investors just say that the risk outweighs the reward when the negative is that earth shattering? With employment reports that you are forecasting, I would think they would flee from MBS and run wholeheartedly in to the treasury market. Our movements would definitely separate from treasury at that point and open up the spread. There needs to be a reasonable expectation that the mortgages will repay, or an explicit guarantee from the government. Either will suffice and bring the flood of investors you are describing.

Dean Gorenflo

Brian...read here: http://www.mortgagenewsdaily.com/mortgage_rates/blog/47512.aspx#comments This was very discussed in yesterday's blog on the Fed buying 16.8 bn. Read through the comments.

Litka

Wells Fargo's best refi year was in 2006 where we did $36B in refi volume, we have already surpassed that volume by $2B more just in January of this year, we have added 12 new processing centers.....What does all this tell us? Keep in mind that all of this coming from a GOOD bank, very conservative...Folks, processing centers are hammered, the best thing that can happen to us is have rates this high so customers can stop shopping around for rates and let us clean up the pipelines a bit, we will see lower rates and the refi boom will start soon and las thru early 2010....My advise, build up your pipelines, manage your time right and don't forget about the purchase business....rates will cooperate with us soon...

David Thompson

Dean- I totally get and appreciate your comments. I have a pessimistic outlook for jobs. I remember hearing somewhere in my Wall St. travels that a healthy economy the size of the U.S. SHOULD be creating about 125K-150K jobs a month. So that means, in my thinking,that for 2008, we're 4.1MM jobs from healthy(not just what we lost, but add in what we should have created so its a 2.6MM actual loss plus 1.5MM healthy loss). Thats a wide chasm between healthy and where we are. I'm afraid that one day soon investors will understand the impact of this number. If that happens before we see a trend reversal, piss on the fire, call in the dogs and turn out the lights. I better have ALL my pipeline locked and my resume updated. Your comment about opening the spread is, in my opinion, dead on. I really don't think mortgages will improve until after the 10 year yield gets back below 2 and investors eventually migrate to MBS as the spread compensates for additional risk.(That means spread widening before eventual tightening or treasuries moving DOWN in yield fast than MBS). With the aversion to MBS because of collateral quality, I think we need to look at 10 year for MARKET direction(Yes I know that MBS prices come from MBS bonds, please don't give me the Habib treatment LOL!) and wait for MBS to follow. Right now, MBS is not strong enough to lead, it can only react and follow. This will continue until foreclosure problem is solved and underlying collateral retains value. Of course if the AAA rating on treasuries ever disappears, all bets are off.

Adam Quinones

ugh...I removed all the ghastly grammar errors. Sorry about that I was running late when I posted....

Adam Quinones

Im liking this discussion so far...GREAT COMMENTS....come on more people chime in!!!

Edgar

Their buying less and less because there is less and less product being offered. If you remove the 5.5 product (buy it all up) then lenders will offer lower product to be purchased. The Fed can reuse that money as it gets paid off as rates go down over time. Do I get a gold star or am I completely wrong? I agree with the above that if jobs/economy get too bad, rates will be forced up. And if the US even gets a ratings watch, forget it game over...what's C. Hern's line at the end of a Laker game? The day these investors learn what true deflation is, the day Asia learns we're not going to buy even half of the products they produce, and the day we start pushing 15% unemployment is the day the music will die. The government is carrying way too much debt as is and they want to add trillions more in the next 12 months. Not sure if they know it or not, but that means something especially when you have a shrinking revenue base because of unemployment and higher operating cost. Unless this admin. can come up with a revolutionary quick fix, there are going to fail like the previous administration. Lets build bridges?????? Let's say there are a thousand bridges ready to be built that will get funding and all those jobs would be a big boost to the economy. Best case is 6 months before they start building, and add another 6-12 months before the worker starts spending again. The cycle is too long, as the economy is in meltdown mode, jobs are in meltdown mode and our banks are insolvent. Another poster mentioned the other day this: Push rates to 2-3%, save the American homeowner 500 per month and that will be the fastest way to get things going again....and I fully agree. However, we've might have missed the boat, so to make this truly effective new guidelines need to be put in place (ie allowing someone to refi even though they owe more then what the property is worth). This problem started with the housing industry and the fix should be focused on the housing industry.

Edgar

Litka. I agree that Wells was a good bank, before they bought Wachovia. Not sure if you know the type of loans World Savings did (they were bought by Wachovia) but it was the single reason Wachovia collapsed. I hope they're smarter then B of A about this purchase (as I do believe they were-may still be-the last solvent large bank) but if the last 12 months have showed us this: When a good bank buys a bad bank, that good bank turns bad.

Edgar

Adam: the bigger question is what happened to the roid rodent...lose a bet to David?

David Thompson

Edgar- Good stuff. I'd love to see rates down in the 2-3% range but how do we get there? Look how well we're doing with a 4-4.5% range that the Gov't. is pushing. So how is it accomplished? Does the Gov announce a special program and float special revenue bonds to accomplish this? Do they use proceeds from 5/10 year auction,or is that "earmarked" for immediate debt reduction and paying off maturing issues? Do we issue 5/7/10 year arms at 2-3% giving homeowners a time horizon to get their financial lives together and reduce housing inventory then 5/7/10 years out, homeowners can refinance or move at market rates? Or did we just do that with subprime, only with higher rates and valuations? When rates get to 4%, do we stop using appraisals and refinance everyone as some have suggested? I've heard plenty of suggestions, but I really don't know the answer. So many questions, so little understanding on my part.

David Thompson

Was this someone else's picture before me?

Edgar

David: You want a plan????? I am only good for pointing out what should be done :) Maybe the gov't does have a plan for this: http://www.reuters.com/article/topNews/idUSTRE50P6MB20090131?sp=true "suggested mortgage help as well, proposing government-backed 4 percent fixed-rate mortgages for "any credit-worthy borrower..."

Edgar

Adam Q used it for a day or two then went back to his glamour shot from his trip to the mall photo studio on prom night.

Tom King

You need to both put some form of backstop in place on values while improving affordability (or at least "perceived affordability"). Lower rates are the key to this. I don't think you need to be at 2-3% to get things moving, but there is a huge psychological barrier at the 5% mark. Look at refi applications-thru the roof in the 4s and a full retreat at just North of 5%. 5.125 might as well be 5.99999, but 4.99999 is the deal of the century. The Gov't put the 4.5% number in play, and while I like the idea of smaller government as much as the next guy that is simply not in the cards right now. The jobs piece is the truly frightening one-my area (Triangle NC) has been immune to job losses up until the past few months, but now the layoffs are fast and furious.

David Thompson

prom night. LOL

Edgar

now i have a mug shot to make fun off...

Adam Quinones

ah thank you edgar!

Jon Kiefer

This is off topic but I wanted to thank you folks for having such a great website. We just went under contract to build a new home and the stuff I've learned hear may prove very valuable when considering locking a rate, etc. I've already learned some basics about MBS and how their price/yields correlate to lending rates.

Bobby Downey

I posted on a different blog last week that the FEDs objective for buying up the 5.5% is to limit the prepayment exposure to other investors...I agree with Edgar that if the FED buys up the 5.5% coupon then they will reinvest the money when paid off early and probably make a profit....reading CNN.com today and talking about Obama's proposal to lower mortgage costs..republicans are pushing for a governemnt backed fixed 4% rate for any "credit worthy" borrower....interesting but when this hits the mainstream on Monday it is going to cause all of us problems on current loans....can they do it? I would think that if they do it they would have to offer it to everyone and not just purchasers or there will be public outcry...this week should be interesting if not anything....

Larry Gross

I agree that the Fed is buying up in the coupon to push mortgage rates down. The question for me is, can they actually succeed in pushing rates down? Personally, I think there’s a tug of war going on right now. As I’m sure you all know, there’s an old saying in finance: Don’t fight the Fed. So, if the Fed wants lower rates, they’ll get it. The problem is, what happens when the Fed fights itself, or, more to the point, the Treasury Department fights the Fed. In that regard, there were four news items last week that were disturbing for me: 1) The yield on the 2-year Treasury auction came in higher than expected; 2) The Chinese said they’re rethinking how much U.S. debt to purchase; 3) The Russians said they’re going to quit buying U.S. mortgage backed securities; and 4) Congress inserted provisions in the stimulus bill to limit steel for infrastructure projects to U.S. steel, raising fears of protectionism and making foreigners nervous about buying U.S. debt in the process. In effect, with all the debt the U.S. is issuing, we could wind up with too much supply (hence the higher yields in 1.) and not enough demand (2.—4.). So, we could have higher interest rates and protectionism, which, as I’m sure you all recall, were two of the events that exacerbated a recession and turned it into the Great Depression. Now, the Fed could buy up Treasury securities, but not all of them. Investors will have to buy some. So, to get back to my tug of war point, the Fed wants lower rates. The actions of the Treasury, etc., seem to be pushing rates higher. What’s going to happen? Who’s going to win? I don’t know. I suspect there’s going to be a stand off and as a result mortgage rates will remain in a range for the foreseeable future. Although, I have additional thoughts I’ll outline in a separate post. In the meantime, someone please tell me I’m wrong about the potential for higher interest rates and protectionism possibly leading to a depression!

Larry Gross

My previous post was the pessimist in me speaking. Here’s the optimist. President Obama says he wants lower mortgage rates. The Republicans say they want lower mortgage rates. Bipartisan heaven for mbs. Also, another news item last week said the refi rate went down considerably. I suspect a lot of people are going to hold off on refinancing to see what happens to mortgage rates, especially in light of the statements by President Obama and the Republicans (not the name of the latest rock and roll band). So, people hold off on refinancing and the demand for refinancing starts to drop, lender pipelines start to clear, while lenders have added capacity to handle higher refinancing volume. Now, lender have clear pipelines and capacity, but less demand as consumers hold off for lower rates. So, there’s too much supply and not enough demand. At that point, lenders start to vigorously compete with each other to attract new business by lowering rates substantially. It could happen. My above analysis is more of a macro-economic analysis, looking at the world picture. This is more of a micro-economic analysis, looking at the behavior of individual consumers. Which is correct, the macro or the micro? Which will overwhelm the other, the macro or the micro? Who will win, the Steelers or the Cardinals? Who knows? I think at this point about the best we can do is sit tight and see what happens, and keep in mind, it’s better to lock when you should have floated than to float when you should have locked. That’s it. Enjoy the rest of your weekend.

Gary Powell

Could the Fed be buying 5.5's because they are trying to support home sales and not refi. That was what they were originally talking about anyway, wasn't it? Higher LTV's on home sales, especially first timers, usually equate to higher rates. I wish we could someone like Bill Goss from Pimco in here to discuss this. The original intention of the Fed's MBS program was to spur home sales, not necessarily refis. All this may be for naught if lenders and MI companies continue to tighten credit requirements. I see FICO requirements for FHA creaping up, the same way that conventional first timer programs did last year. If the government really wanted to have an impact on borrowing they should force down FHA standards and spend a few million to buy a couple of MI companies. They should be able to get them dirt cheap right now and the money spent would be a drop in the bucket compared to the other money they have pumped into the financials.

Jason Seedig

In my opinion, the treasury report and 10/30-year chart shows a perfect example of supply and demand. You have a massive oversupply of Treasury notes available on the market, and poor performance in recent auctions, notably the 5-year. Secondly, it is all about swaps. You have foreign banks swaps with the treasury that have parked hundreds of billions with the fed in anticipation of shorter-term rate spreads opening up. Money out of treasury bonds and MBS's into swaps takes funds out of the market, and with a .63%+ move in T-bonds in the past several days, that will have a negative impact on the attractiveness of MBS in lower coupon rates. Thirdly, as many have suggested, we may have a slight reversal in theory by the Treasury, they will continue to purchase MBS however now they are keenly aware of the overstuffed originator pipelines and if they continue to support lower coupons, they will continue to exacerbate the issues with little benefit on their balance sheet. Therefore, it makes sense to support higher coupons that will soften the move towards their lower 4% target range over time. This is actually a positive for us as a slower move is more obtainable by the consumer and deliverable by originators. My $.02

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