I am not going to sugar coat it for you this morning....my fears are coming to fruition. MBS market participants are once again chasing profits in higher yielding mortgage coupons. This signals a clear disregard for prepayment risk and gives me an unsettling feeling. Remember: a borrowers option/ability to refinance their mortgage into a lower rate is the most threatening risk faced by an MBS investor. Well....yesterday the "up in coupon-ers" (that affixed  a precarious premium in your rate sheets over the past few weeks) made it very clear that they deem it worth the risk to bet on the short term flattening of the S-curve (overall percentage of MBS pool's balance that prepays charted on time line).

The favored coupons...6.5s and 7.0s (even though these coupons are "in the money", they are backed by credit impaired borrowers who are less likely/able to refinance). This trade will continue to transpire until MORE DETAILS ARE PRESENTED. This doesn't necessarily imply investors will bake in added premiums to their rate sheets but it does suggest pricing strategies will remain erratic. HOWEVER Loan officers and borrowers  alike can take some solace in the fact that the FEDERAL RESERVE, THE TREASURY DEPARTMENT, AND GSE DESK CONTINUE TO PROVIDE SUPPORT FOR 4.0s and 4.5s.

Plain and Simple: Dont Panic. We've been through this before...the Fed has our back until March 4. TIMMMAAAAAAY!!!!!

1130am marks...

FN30________________________________________

FN 4.5 -------->>>>  -0-04  to 100-21  from 100-25

FN 5.0 -------->>>> -0-01 to 101-29 from 101-30

FN 5.5 -------->>>> +0-00 to 102-15 from 102-15

FN 6.0 -------->>>> +0-02 to 103-08 from 103-06

Last night President Obama addressed the nation. He exuded confidence and his tone was poignant. His verbiage was uncomplicated and encouraging. Unfortunately his statement lacked new details (nothing on bank nationalization). Instead President Obama expansively outlined his ambitious goals to CHANGE the WORLD. His priorities include a focus on education, healthcare, and energy. He urged the Congress to act soon to reform our aging regulatory system, he indicated that we cannot "walk away" from the automakers, he pledged transparency and promised bipartisan objectives. Most of all President Obama attempted to offer hope...

"But while our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before"

But he made sure to alert the masses that the rebuilding process will require more government spending.  On Thursday we get his budget which he said "reflects the stark reality of what we've inherited-a trillion dollar deficit, a financial crisis and a costly recession."  One thing is for sure...in order for any plan to work people have to believe in it.

How did you react to his Address? <---- CLICK TO SHARE OPINION

This morning the Treasury Department will begin  testing the balance sheets of 19 troubled banking institutions. The objective is to identify the capital needs of banks over the next two years. Yesterday Ben Bernanke said.... "The outcome of the stress test is not going to be fail or pass....instead it is to "get a clear estimate of their capital needs." Any banks who are lacking capital will be told to raise private capital (chuckle) and if they were unable to do so they must apply for funds under the Capital Access Program, which is funded by TARP v2. Does anyone think these stress tests might just increase bank write downs and intensify a run on the entire banking system? <--LINK TO FORUM.

Other News...

Mortgage Bankers Association Weekly Application Survey....for the week ending February 20, 2009. I bolded the significant verbiage. Notice the trend.

 The Market Composite Index was 743.5, a decrease of 15.1. The Refinance Index decreased 19.1 percent to 3618.0 from 4472.9. Purchase Index decreased 2.6 percent to 250.5 from 257.3. The Conventional Purchase Index decreased 4.4 percent . The Government Purchase Index (largely FHA) increased 0.8 percent.

The four week moving average is down 4.2 percent for the seasonally adjusted Purchase Index, while this average is up 1.7 percent for the Refinance Index.

Borrowers are waiting for more DETAILS!!!! To further that argument....

January NAR Existing Home Sales....DECLINED. NAR PRESS RELEASE

"Existing-home sales - including single-family, townhomes, condominiums and co-ops - fell 5.3 percent to a seasonally adjusted annual rate of 4.49 million units in January from a level of 4.74 million units in December, and are 8.6 percent lower the 4.91 million-unit pace in January 2008."

Lawrence Yun, NAR chief economist, said there was understandable hesitation by some home buyers. "Given so much stimulus package discussion in January, some would-be buyers simply sat out for clarity and certainty on the nature of housing stimulus," he said. "The housing market will soon get a lift from very favorable buying conditions - not only from improved affordability, but also from the stimulus of an $8,000 first-time home buyer tax credit, and higher conforming loan limits that will allow more people to tap into 50-year low mortgage rates."

"Total housing inventory at the end of January fell 2.7 percent to 3.60 million existing homes available for sale, which represents a 9.6-month supply2 at the current sales pace. Because sales were down, the January supply is up from a 9.4-month supply in December"

"The drop in total inventory is an encouraging sign because the number of homes on the market has declined steadily since peaking in July 2008, and inventory is at the lowest level in two years," Yun said. In January 2007 there were 3.54 million homes for sale."

I know there is a lot of chitter chatter going on this morning...I loaded up Around the Web with some of the stories I have been reading this morning. Check it out...CLICK ME

The Treasury will Auction $32bn 5 year notes at 1pm

Ben Benanke is talking about Bank Nationalization right meow...

Stocks are bouncing around and TSY yields are moving up. MBS market participants are heading up in coupon...the Fed continues to support the short side of the stack...