Posted
MBS sold off late in the day...I explained why in THIS POST.
I am hoping it has nothing to do with what I am about to tell you.
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"To provide greater support to mortgage lending and
housing markets, the Committee decided today to increase the size of the
Federal Reserve's balance sheet further by purchasing
up to an additional $750 billion of agency mortgage-backed securities,
bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency
debt this year by up to $100 billion to a total of up to $200 billion. "
This means the Federal Reserve is now committed to provide $1.45trillion
in supply support for the mortgage market. When all is said and done the government
will own roughly $3 trillion agency mortgage backed securities (taking into
account what the GSEs already own). That is about 75% of all agency MBS
outstanding!!!
Plain and Simple:
There is an abundance of MBS demand to offset the expected superfluous supply
of refinanced loans.
The MBS market responded to the news by immediately moving "down
in coupon" at an aggressive pace. Matt aptly outlined the events that
unfolded yesterday afternoon in this blog post....READ ME IF YOU DIDNT ALREADY!!
If you were watching the news you would have noted several
headlines that indicated mortgage rates had dropped markedly in a matter of
minutes. These headlines quickly prompted borrowers to contact their mortgage
bankers and brokers to inquire about a 4.00% rate and a much needed lower
payment.
Well....Unfortunately the media's interpretation of the
Fed's policy statement was not TOTALLY accurate. Yes....immediately following
the surprising statement from the FOMC, MBS prices, the basis for mortgage
rates, did skyrocket and traders definitely pushed the current coupon back
below 4.00% (down in coupon). Obviously
we were all extremely excited by the comforting/confidence boosting actions of
the FOMC. Now that the initial
exuberance has faded we have some big issues to consider before we can
begin to discuss "IT THAT SHALL NOT BE NAMED" again.
The demand for MBS remains healthy and stable. MBS market
participants are not trying to decide whether or not to buy MBS, most investors remain overweight Agency MBS....mortgage investors are however having some difficulty trying
to decide WHICH MBS TO BUY!!!!
Plain and Simple:
What MBS coupon will maximize cash flows and profitability????
The answer to this question lies in BORROWER PREPAYMENT BEHAVIOR....unfortunately borrower refinancing behavior
is dependent on several factors...
Will borrowers qualify? What is primary/secondary mortgage
rate spread? (MBS prices vs. Rate Sheet
prices = are rates perceived to be low enough?). Will Mortgage Insurance
companies decide to offer a DU REFI PLUS equivalent mortgage insurance program
(need credit and DTI waiver)? Will lenders cooperate with SUBORDINATION
AGREEMENTS? What about warehouse lines...you cant fund loans if your line is
maxed out! Will lenders implement streamlined/automated delivery processes to
increase efficiency? Will loan fall out increase borrowing costs? What is
servicing worth in a contracting labor market?
So it appears that the answer to the most important factor
driving mortgage rates, expected
prepayment behavior, is dependent on A HOLE BUNCH OF LINGERING ISSUES that
we still don't know the answers to? Yep...
I am not trying to be a worry wort...lets just say I learned
my lesson once and I will not be making the same mistake again.
I am happy to report that lenders definitely passed through
SOME MBS gains to borrowers today. Primary/Secondary market interest rate spreads were drastically tighter this morning compared to yesterday and from my interactions
with investor lock desks, borrower commitment activity was abundant...so that
means a bunch of borrowers decided to take advantage of ALL TIME RECORD LOW
CALL GUINNESS (world records) MORTGAGE RATES.
The bad news is the MBS market is ALREADY questioning the appropriateness
of their initial face melting "down in coupon" reaction to
yesterday's FOMC policy decision. (BTW I asked Matt if it was OK to use his
catch phrase...he was cool with it). Did the MBS market overreact???? HMMMMM....when you think about it....the additional $750bn isnt
a big necessity AT THE MOMENT considering the Fed was having no trouble mopping
up any and all originator supply being
offered up. (Originator supply: when you lock your loan mortgage banks do the
same thing which leads to more supply in the MBS market).
I know I know...just grin and bear it I will be off my soapbox in
a moment...here is how we can help to avoid another run back "up in
coupon"...
Borrower perception is very important right now. Borrowers:
if you are even considering a refinance you should be contacting a mortgage
professional. Get a loan application submitted, see if you qualify!!!
MORE MORTGAGE APPLICATIONS is a good start to keep the MBS
market on its heels!
Then we need more of what we saw this morning in regards to
primary/secondary spread tightening. Once we perceive that lenders no longer
"owe us YSP" then perhaps borrowers will stop waiting around. If
lenders are willing and able to attract and serve the herd of "refinanceable"
(not a word I know) borrowers...we will avoid another MBS market move "up
in coupon".
It was refreshing to see some primary /secondary spread
tightening today...it gave us hope that lenders are going to participate in the
process of "the stars aligning". But we still have some bigger issues to address...for
instance borrower credit is showing no signs of improvement and have you tried
to get a second mortgage resubordinated lately? 60 days? How will that affect lender fall out?
Plain and Simple:
I am worried the MBS market maybe trying to convince itself that they overreacted to the FOMC policy announcement.
I am concerned that traders will soon look to offset prepayment fears with a
little more specified pool buying. I have mixed thoughts on the effects of loan
fallout and increased lender hedging costs. I am hoping that the credit
repositories can find a way to align their risk scoring models.
Lastly I am concerned that borrowers may be expecting too
much from mortgage bankers and brokers....no we cannot offer you a 4.00%
mortgage at the moment nor have we been able to do so thus far unless you didnt mind paying points. I am not trying to scare anyone off the fence, it is only one day
after the FOMC announcement....all I ask is that you buy your lender some time and submit a loan
application.