Good Morning.
Short term day trader's MBS coupons of choice continue to lose
their appeal to yield chasing accounts this morning. The richness of 6.00 and
even 5.50 coupons is forcing "prepay anxious" levered (spending
borrowed money) mortgage investors "down in coupon" into the
production MBS side of the stack. This will eventually lead to MORE LIQUIDITY
for the MBS coupons that mortgage originators wish to sell on the MBS market
which just adds further stability and tighter ranges (depending on the
gyrations of the yield curve).
There is a but...the relative value of mortgages remain at the mercy
of the gyrations of the yield curve and its relation to the sentiment of the
stock market. At 1030 this AM TSY yields went on the rise and MBS prices
suffered, although not as much as TSY prices/yields...this implies that MBS
yields continue to remain insulated from the broad extent to which mortgage's risk
free benchmark yields go up or down. Translation: although MBS is at the mercy of the steepness
of the yield curve....mortgage buyers will continue to BUY ON WEAKNESS (wider
spreads) and TAKE PROFITS ON STRENGTH (tighter spreads)....which has resulted
in high liquidity and stable ranges. Furthermore "rich" MBS prices
will exacerbate the selling on weakness..even though that willingness to let
the stack cheapen has resulted in some reprice alerts(LIKE THE ONE WE JUST POSTED)....over the past month buyers have quickly
returned to take advantage of cheaper MBS prices. Check out the choppy
downswing of MBS prices as TSY yields shot up at 10:30...this shows MBS's resiliency while their benchmark deteriorates.
Trying to fight the sell off....look at the upticks in between the downticks...MBS FIGHTING!!!
WHILE TSY YIELDS GET PUNISHED BY SHORT TERM STOCK MARKET OPTIMISM...
Yesterday production MBS (rate sheet influential coupons) prices moved slowly higher in a tight stable
range, by afternoon a few mid level/regional lenders began to publish new rate
sheets...but not everyone.
Why Didnt More Lenders
"Reprice for the Better"?
Remember last week when we told you originators were dumping
supply of MBS? This "supply dumping"
is how mortgage bankers lock in their income...much of the same way you lock in
a rate and corresponding YSP of an individual loan.... except the investor's
lock is a mandatory commitment (many of you do not utilize mandatory
commitments because you do not wish to hedge your pipeline). This process is most likely to occur when MBS
prices are near the top of their trading range....much like you look to lock in
your loans when YSP appears to have been "passed through".
By locking in last week lenders protected their pipeline
from interest rate risk and locked in some profits in the process. This hedge
is made possible by the "selling forward" mechanism within the in TBA
MBS market. "Forward commitments" are however not always loans that
are actually ready to be closed...they are loans that the investor expects to
close by MBS settlement date.
Now that lenders have locked in their profits....they will need to close loans in order to fill their
"buckets" and meet their commitment....but they dont have to do it
all at once. Lenders who have already protected their pieplines will have the option to offer tighter
pricing based on factors other than MBS day over day pricing
fluctuations...like supply/demand of borrowers and the competitive actions of
competitors.
How Does this Effect Smaller/Regional Lenders?
Smaller mortgage companies, like the lenders who compete on
a regional scale, are often times slower to "pass through" intraday
market gains. This is a function of the "trickling down" process of
MBS gains through the mortgage pricing supply chain. Your position within the mortgage pricing supply
chain is a factor of WHO you sell your
loans to and HOW you sell them.
Do you sell direct to FN/FRE cash windows? Are you utilizing
mandatory commitments or best effort? How about
Assignments of Trade? Maybe you are selling "bulk" pools of loans? Do
you have a correspondent or broker relationship with your funding source?
There are several different conduits that a mortgage company can
choose to sell their closed loans...all of which imply different market risks
and back office responsibilities and correspond to different pricing
haircuts and incentives. The farther down the mortgage supply chain you
are...the more reliant you are on the investors above you to "pass along gains" . So many times you may
find frustrations by our exuberance over MBS gains and a lack of cooperation
from lenders who are looking to balance
their workloads and tweak their balance sheets..but those investors may be feeling the same frustration about their sources of funding.
The logical solution is to move yourself up the mortgage pricing supply
chain, but we all know that not all lenders are fiscally or operationally capable of that....so in the mean time....
instead of focusing totally on the intraday movements of the loan
securitization market...you will find a great deal of insightful guidance in
the daily process of pacing the pricing behavior of your individual lenders and the relationship to the MBS market's improvements or deteriorations (something I am
working on doing for you).