It has been recently noted by more than one financial analyst that these last two weeks have seen more "ups and downs" across all market sectors than most any other time in history.  To those of use waiting to lock a mortgage rate or simply trying to follow the mortgage market this does not come as much of a surprise.

Today was an ugly day for MBS (mortgage backed securities), but not as ugly as it might have been.  One of the key factors adding to the carnage today was a lighter than normal trading volume combined with a lack of scheduled data.  Here is why those two factors are important.

lighter than normal volume

This one is fairly simple.  If little Johnny the bully only has the energy to steal 5 dollars of lunch money per day, and each kid is carrying 5 dollars, and there are only 100 kids on the playground, then Jonny's bullying only decreases the total wealth of the playground ($500), by 1%.  However, if we decrease the volume of children bringing money to the playground (or traders bringing transactions to the MBS market), say to around 20 kids ($100 total wealth), now when Johnny steals his five bucks, it decreases the wealth of the playground by 5%.  Moral of the story, market movers have much more impact than they normally would on low volume days.  

lack of scheduled data

This speaks more to market psychology than to market mechanics.  First of all, we must take into consideration that most every week day, there are "scheduled releases," or reports that occur at the same time every week, month, or quarter.  Most of these scheduled releases recur in the month over month category with week over week being a strong second.  These reports vary in importance but all in all they are one of the principal tools with which traders gauge their market decisions.  When a report (say the "retail sales" for instance) comes in stronger than expected, in most cases it is a good sign for the stocks that are related to that report and sometimes to the broader stock market.  This in turn, is usually bad for bonds, forcing mortgage rates to rise.  In a vacuum of data, were retail sales to be the only report of the day, and assuming it was stronger than expected, it would be a very reasonable assumption that stocks would advance, and bonds (mortgages included), would decline.

But there is usually more data than that.  Keep in mind that there are always financial headlines as cnbc and bloomberg will be happy to point out.  But at any given time, especially considering global markets, there is literally more data than you could possibly digest, even on days with no scheduled releases.  All it means is that the OTHER forms of data, such as earnings, analyst commentary, ratings changes, political news, trade organization reports, stock and commodity prices (oil ring a bell?), etc... will not only have more impact than they normally would on this "bigger picture," but that there will also be a scrambling among the psyche's of the masses to determine WHICH among the raft of headlines is the most significant and what the logical action is.  Wow!  

Even if you don't want to internalize all that, just know that because there is more uncertainty as to "what to watch" and "how to act on it" once you decide what to watch, that there is more volatility than on days where everyone can agree that the scheduled data is "what to watch" and already knows "how to act on it."  Hopefully that makes sense.  Final pedantic simplification for those who still need it. 

No scheduled data=volatility higher. 

Low volume trading=volatility higher.

All that to say, don't read TOO much into today's crappy numbers, it was both a low volume day and saw some crappy headlines.

I'm very intrigued to know more about these numbers and crappy headlines, do go on!

Why thank you!  don't mind if I do.  

  • Not to tear the band-aid off too quickly, but we lost around .375% of a discount point today which usually equates to about an eighth in interest rate.  This is a medium bad day.
  • MBS are not only measured by their prices (which directly determine rates), but also by their prices versus their main alternative, Us treasuries (aka "spread"), in order to determine relative value (treasuries pay less, but are less risky).  After a horrible horrible spread day on thursday (treasuries did fine, but MBS got pummeled), MBS had an amazing rally on Friday.  As opposed to spread diverging too greatly today, BOTH treasuries and MBS suffered on account of several unfriendly headlines and internal reports.
  • To paraphrase in excruciately condensed verbiage what an analyst said about Fannie Mae this morning: "Fannie Sucks, and you should plan on them continuing to suck."  Pretty much, that was the shot heard round the world, and was the beginning of the end for mortgage rates at 945AM Eastern time.
  • In addition, there were other conflicting pieces of analysis from several major firms, but the general tenor was negative.
  • The fact that oil continues to decline and stocks continue to improve did not help either treasuries or mortgages. 
  • Without the MBS specific data, MBS probably would have had another great day versus treasuries, but that is but a dream


OK, I haven't been reading all that, what's the bottom line?

All of that said, at least a few analysts at more than one wall street firm believe as I do that mortgages are just spinning there wheels, poised for a take off as the wheels finally find their grip.  it will take a couple of factors, not the least of which include the stabilization of Fannie and Freddie in the eyes of the masses (the financial community masses).  As an originator, I have a hard time, considering a) the fact that the failure of Fannie and Freddie would likely cause more damage than even the American Taxpayer wants to endure let alone understand (thus garnering federal support), and b) the fact that the loans Fannie and Freddie have been insuring in 2008 are of a meteorically higher quality than those from their college daze (days?, both?  sure), that the Fannie and Freddie situation will stabilize one way or another, but will certainly not end in anything remotely similar to a catastrophic Bear Stearns-esque bailout.  If you disagree, print and save this page and send it to us if I turn out to be wrong, and you can have my job.

 Humor aside, there is a lot of panic and emotion tied up in Fannie and Freddie right now.  And I don't even know how much the analyst community wants to admit that it's having on MBS prices currently.  There are always a million factors in MBS price to be cited, but the 800 LB Gorilla in the room is UNCERTAINTY about the continuance of the mortgage crisis with Fannie and Freddie being the hosts of the party (or at least the homeowners of the house where it's being thrown).  Sure, Indymac and Bear Stearns already got sent home.  Countrwide got told to go sit in that corner and report directly to BofA.  Everyone has occused Lehman of being too drunk to drive, but he's still standin. 

You see?!  Not only is the situation rife for parody, but it's strikingly germane!  This is just like one of those "not another teen movies," and we're right in the middle of the climactic party near the end of the movie where the geek gets the girl, the frat guy gets his comeuppance, the nerdy girl gets the hunky guy, and the adults learn life lessons from the kids.  Only whereas that average hollywood script is woefully predictable, we have absolutely no cinematic or financial precedent for what's occurring.  That, my fine friends, is, in a very broad sense, one of the key driving forces behind our volatility.

I wish that simply commenting on it here made it go away, but alas!  No dice.  The volatility will continue.  The fact that Fannie's rating got cut today by several ratings agencies from AA- to A- is a big deal.  It's actually a major curveball to our annual trends when taken into consideration with the stock rally we have underway.  Until today, it seemed obvious that mid-July would be the worst point this year for rates, but now, there is a little buzz suggesting a bull stock market and absence of "mighty mouse" MBS data (God knows SOMETHING needs to come to save the day), might push that annual low into August.

Whatever the case, the widsom remains, well, wise.  The longer you have to wait until deciding, the more safely you can float.  As of today, we have gotten very near July's lows.  Floating into tomorrow is risky, but not quite as risky as it would be if rates were a little better historically.  I don't normally EVER take a strong stance on lock vs. float, but I'm going to go ahead and say that floating is probably a slightly better choice than locking providing you have a week or two to get your rate back.  For the ultra short term?  flip a coin!