Throughout late 2011, Fannie 3.0's truly took on a role as "it that shall not be named" in the Live Chat window on MBS Live! Indeed, at almost no point in 2011 did it make any sort of sense to even consider the existence of Fannie 3.0's as they simply weren't trading. But that fact has been gradually changing into the new year with 3.0's seeing their best day of new origination on Friday.

If this excites you, don't get too excited yet. Volumes are still rather low overall and quite low compared to 3.5's, but certainly worth keeping track of at this point. Interestingly enough, the same 2.5 points spread in price between 3.5's and 3.0's that was seen between 3.5's and 4.0's acted as sort of a line in the sand before the lower coupons began trading more actively.

Friday's prepayment report also helped out, allaying some concern about the recently "fast" prepayment speeds in lower coupons. With that in mind, working our way down to 3.0's will be a delicate dance--one that can't happen too quickly without lenders risking the cannibalization of recently originated 4.0 coupons, though 3.5's seem at less risk relatively. So there will be a fair amount of resistance to 3.0 origination for that reason as well as the simple risk involved in delving into markets that haven't previously existed (and that could be a very unhappy place to be if benchmark rates correct in a meaningful way).

But as long as 10 yr yields are calmly range-trading near 2%, healthy trading in 3.0s is an increasing possibility. As we said, it will just take time. As for today, there have been a decent number of quotes though 3.5's are still much more active. Fannie 3.5's are up 6 ticks on the day at 103-09 and 3.0's are within the 2 point spread, currently 101-11.

The number of housing markets showing measurable improvement nearly doubled in January with the addition of 40 new metros to the National Association of Home Builders/First American Improving Markets Index (IMI), released today. The IMI now boasts 76 improving markets, up from 41 in December, with 31 states and the District of Columbia represented by at least one entry.

The index identifies metropolitan areas that have shown improvement from their respective troughs in housing permits, employment and house prices for at least six consecutive months.

More Americans Think Economy is on the Right Track; More Respondents Expect Home Prices to Improve

-Twenty-two percent of Americans say the economy is on the right track (up by 6 percentage points since November). The percentage who say the economy is on the wrong track dropped to 69% (a decline of 6 percentage points).

-On average, Americans expect home prices to increase by 0.8% over the next 12 months, up from 0.2% in November.

-Twenty-six percent of respondents expect home prices to increase over the next 12 months (up 4 percentage points since last month), while 18% say they expect home prices to decline (down 4 percentage points since last month). 52% say prices will stay the same.

-Thirty-six percent of Americans say that mortgage rates will go up over the next 12 months, up 3 percentage points from November and even with October.

"In addition to the effect on the macroeconomy, this current judicial morass reflects profound and pervasive misconduct in mortgage servicing. It also calls for timely public enforcement. While the courts sort out--one by one--the mortgage servicing cases, the Federal Reserve, together with other federal and state regulators, must create, implement, and complete an enforcement response. Accordingly, in 2010, the Federal Reserve and the other federal banking agencies began a targeted review of mortgage servicing problems at 14 large, federally regulated financial institutions that had significant market concentrations in mortgage servicing..."

(CNBC) The Obama Administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, are very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

As the Federal Reserve alluded to in its white paper on housing last week, "A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios." REO's (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the GSE's and the FHA. Three Fed governors pushed for similar plans in speeches last week as well.

A pilot sales program will be starting in the very near future, according to administration officials. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.

With Japan not around last night to get Monday morning's global trading underway in the usual fashion, volumes have been light. Headlines and events remained uneventful and equivocal into the European session as nothing has really changed with respect to events that were already in focus heading into the weekend, namely another Merkozy get-together to discuss Greece et. al. Highlights include Merkel's call for more private sector involvement saying that "our goal is to have no country leave the Euro Zone" but that if no progress is maid on Greece's voluntary debt restructuring, then the next tranche of aid cannot be paid out. Cue the dramatic music...

MBS are getting a lift this morning relative to Treasuries following last week's prepayment report that showed lower coupons paying off at slower speeds, as expected for this time of year, but perhaps slightly slower than the consensus. This is a small net-positive for relative MBS value because slower speeds mean MBS pools are "lasting longer" and thus investors are able to collect more monthly principle and interest clips. When prices are over par, this is a good thing (investors need to recoup the premium they paid for the higher-than-benchmark rate of return).

Fannie 3.5's are up 2 ticks on the morning at 103-05 and 10yr yields are about 1bp higher at 1.967. Stock futures are flat and scheduled economic data is inconsequential until 3pm. Even then, it's probably inconsequential until later in the week, so we're tuned into tradeflows, EU headlines, earnings, and the threat of an abundant week of corporate debt issuance that could entice the bid away from our beloved MBS.