MBS Pricing Snapshot

A set of special questions asked survey respondents about residential real estate lending policies at their institutions. Banks were asked to compare their willingness to originate a GSE-eligible 30-year fixed-rate mortgage loan intended for home purchase today with their willingness in 2006 for borrowers with FICO (or equivalent) credit risk scores of 620, 680, and 720, and down payments of 10 or 20 percent (for a total of six categories of borrowers).

A large majority of banks indicated that they were less likely to originate a GSE-eligible mortgage loan to potential borrowers with a FICO score of 620 and a 10 percent down payment than they were in 2006. Raising the down payment to 20 percent reduced the fraction of banks less likely to originate such a loan somewhat.

A moderate net fraction of banks were less likely to originate loans to borrowers with a FICO score of 680, regardless of down payment size. A modest net fraction of banks were less likely to originate loans to borrowers with a FICO score of 720 and a 10 percent down payment, although survey respondents indicated that they were about as likely to originate loans now as they were in 2006 if such borrowers had a down payment of 20 percent.

Most banks cited borrowers having higher costs for, or greater difficulty in obtaining, mortgage insurance coverage as an important factor contributing to the reduced likelihood of originating GSE-eligible mortgage loans. About as many respondents noted the higher risk of putbacks of delinquent mortgages by the GSEs as an important factor, and that factor was listed as the most important one by the largest number of banks.

Similar fractions of respondents pointed to less favorable or more uncertain outlooks for house prices or for the economy more broadly as factors. A majority of respondents reported as at least somewhat important factors greater concern about their bank's exposure to residential real estate loans; increased concerns about effects of legislative changes, supervisory actions, or accounting standards; higher servicing costs if mortgages were to become delinquent; the prevailing spread of mortgage rates over cost of funds being insufficient to compensate for risks; and borrowers having higher costs of greater difficulty in obtaining simultaneous second liens.

If it's possible for things to be so far from exciting that they actually become interesting, the past few weeks have been leading up to today as the most interesting day... EVER!

Fannie 3.5 MBS, the coupon that gets by far and away, the lion's share of the origination volume, is trading in a 2 tick range, at maximum! 2 ticks (or 2/32nds = 1/16th of a point, hence the title). For most of that time and indeed with very few exceptions, the range has been merely 0.5 to 1.0 ticks (1/64 to 1/32 of a point).

10yr Treasuries have been similarly range-bound, holding within a 1.5% range all day. The only really safe bet for expecting this dynamic to change is Friday's NFP release, but certainly, it can happen sooner. Additionally, 10's have had a good bit of correlation with stocks today (stock prices moving with TSY yields), so pronounced weakness in stocks could coax bond markets into slightly stronger territory.

But the overriding moral of the story is that markets are thinly staffed, thinly traded, and uninspired at the moment.