MBS Pricing Snapshot

Here's a great example of the perennial discussion of low volume leading to bigger changes in MBS prices on seemingly absent motivation. Indeed, motivation for weakness into the 3pm Treasury close is no more or less than it often can be, but certainly, the volume is significantly lower (this may turn out to be the single lowest day since early April).

With a day and a half of mild improvements behind them, bond markets have some room to free up some cash to put to work elsewhere for the rest of the day without crossing any taboo technical boundaries. MBS are essentially just keeping pace with Treasuries here and none of it is attributable to any headline motivator or fundamental shift in perception or reality--just ebbs and flows, exaggerated by the low volume.

As to whether or not this introduces a major reprice risk, we haven't seen sufficient losses for that and would note that even the volatile trading range established on Friday is fairly narrow as far as volatile trading ranges go. If you consider that the modal (most frequently recurring) highs of thd day were just under 103-22 today and that we're currently at 103-20, a negative reprice seems altogether uncalled for. That said, you can never completely rule out a small risk of minor reprices at a very small subsection of "jumpy" lenders when charts make these shapes. Even then, we might not see a single reprice unless MBS resume selling off and progress steadily below 103-18.

On balance, domestic banks continued to report little change in lending standards for prime mortgages and having tightened standards somewhat for nontraditional mortgages over the past three months. Meanwhile, a relatively large net fraction of respondents reported having experienced stronger demand for prime and nontraditional mortgages over the same time period.

A majority of the large banks indicated that they had participated in HARP during the past three months, though only one-third of the other banks reported having done so. About one-third of the respondents that had participated in HARP reported that over the past three months between 30 percent and 70 percent of all refinance applications were attributable to HARP, while an additional one-third reported that between 10 percent and 30 percent were HARP applications. In addition, about two-thirds of those participating in HARP anticipate that more than 60 percent of these applications will be approved and successfully completed.

The July survey also asked banks to indicate to what extent various factors were affecting their willingness or ability to offer additional refinance loans through HARP. A large majority of banks reported that they had restricted their participation in HARP to those mortgages that they already serviced or held, while a smaller majority also indicated that the high volume of refinance applications had exceeded processing capacity.

Many banks also reported that credit overlays that they had imposed on top of the HARP requirements were at least somewhat important factors in limiting their participation--;a significant fraction of respondents reported having been unwilling to offer HARP refinance loans to some customers with high loan-to-value (LTV) ratios, limited or nonstandard documentation of income or assets, or low FICO scores. Almost all of the respondents that reported "Other" as being the most important factor for having been unwilling to offer HARP refinance loans specified that they did not participate in the program at all.

It's completely dead out there. Sometimes we see days/weeks like this ahead on the calendar and can reasonably assume things will be slow in markets, yet sometimes those days/weeks can still surprise us in terms of movement and volatility. Today IS NOT ONE OF THOSE DAYS. It's every bit the vacation week that it looked to be coming into it.

That said, the simple existence of "slowness" doesn't preclude movement in MBS Prices. It just usually makes for a more "drifty" feeling as opposed to "event-driven volatility or directionality." It's a happy coincidence then that today's drifty feeling is in a positive direction with Fannie 3.0's up 5 ticks at 103-21 and 3.5's very close to the 106 handle as well.

There's still nothing else significant on the calendar for the rest of the day, and it's getting later and later for there to be a surprise European tape-bomb. Cruise control into the afternoon unless otherwise noted.