5pm Marks...
Since 5 pm yesterday
FN30__________________________________________
FN 4.5 -------->>>> -0-04 to 101-00 from 101-04
FN 5.0 -------->>>> -0-02 to 102-01 from 102-03
FN 5.5 -------->>>> +0-00 to 102-18 from 102-18
FN 6.0 -------->>>> +0-00 to 103-09 from 103-09
GN30_________________________________________
GN 4.5 -------->>>> -0-05 to 101-15 from 101-20
GN 5.0 -------->>>> +0-00 to 102-20 from 102-20
GN 5.5 -------->>>> +0-03 to 103-01 from 102-30
GN 6.0 -------->>>> +0-01 to 103-16 from 103-15
In regards to last night...
Everyone take a deep breath....no need to panic.
Recall the December/January MBS rally that sent rate sheets into the mid 4.5s. The current coupon that we centered our analysis around fell from 5.5 to 4.0 in a matter of weeks. Pipelines filled with eager borrowers and MBS watchers floated freely while borrowers took note of "record low mortgage rate" headlines. But soon after we grew comfortable with the rally some odd occurrences began to take place... 15 day locks started disappearing...turn times grew from 10 days to 20 days...an out of ordinary amount of activity quickly overwhelmed ops centers. Operational overload ensued...
Originators were forced to justify extension costs and lock expirations.... the MBS current coupon began to climb out of the 3.00% range into the 4.00%s. Every day rate sheets seemingly worsened and borrowers grew weary of waiting for 4.0%. The negativity began to breed on itself...what was once mortgage heaven turned to mortgage hell. Everyone felt like they missed the boat...borrowers passed up all time low rates and loan officers just barely missed that long awaited pay check.
Since then mortgage rates have gone stagnant and the herd has become more and more willing to wait it out for "it that shall not be named".
Now What?
The broad based borrower bias regarding lock vs. float is currently stuck in "FLOAT for 4.0%" mode.
MBS Translation: Diminishing Fear of Prepayment Risk
For a portfolio manager, a diminishing fear of prepayment risk creates the opportunity to safely take on the additional risks of higher yielding coupons. In other words they can therefore move "up in coupon" with less fear of losing cash flows.
Over the last few weeks these "up in coupon" yield chasers have been actively employing short term profit maximizing strategies. As the prices of fuller coupons got more and more expensive, profit takers reigned in MBS gains which generally resulted in reprices for the worse from lenders. The Federal Reserve has managed to stabilize the pace of the "up in coupon-ers" helping to keep rate sheets from further deterioration. (Thank you Fed!!!)
But recently MBS bids have been better...I know at least two lenders who improved pricing a full point in the last four days. Borrower interests appear to be incrementally increasing. Activity at lenders is picking up and 15 day locks have returned to rate sheets. Rates have improved enough in the past four days to convince SOME "on the fence borrowers" that it is time to Lock and Close. This Week has been Good!!!
So Why in the World would I go and spoil the atmosphere by posted a blog titled MBS UPDATE:THINKIN HIGHER RATES
Plain and Simple: Last night when I said that there isn't much room to push MBS higher, I meant that MBS prices are getting too expensive again and "up in coupon" profit takers are looming. Because I believed that MBS prices were too expensive and profit takers were due to sell in the near future. I decided to tell you to expect higher mortgage rates for a spell.
Going Forward
I know I have been an advocate of "it that shall not be named" so the general sentiment around here is that there are better times ahead. But I needed to grab your attention so I could properly stress the fact that reaching "it that shall not be named" will most likely involve the alignment of several stars.
As borrowers wait for lower rates the MBS market will continue to maximize returns in "up in coupon" day trading. This "up in coupon" strategy will remain in effect until MBS market participants are convinced that lenders are serious about a "it that shall not be named". What will come first??? The Chicken or the Egg???
Plain and Simple: Unfortunately we have only seen a few cases of noticeable rate sheet improvements so it appears that we will continue to patiently wait...and in the process continue to be subjected to range trading and profit taking.Remember the MBS market does not like 103/104 prices, so don't lose track of profit takers in a rally. But also be careful not to let the "up in coupon vs. Fed" battle lull you to sleep either. Stay aware of investor turn times and track 15 day prices. Once we start noticing changes, borrowers will start noticing changes. Once borrowers start noticing changes, MBSrs will notice changes. Once MBSrs notice changes they will react by moving "down in coupon". Above all do not underestimate the power of the Federal Reserve and political headline news. The Fed has $385bn more to spend and the Obama Adminsitration is quite focused on saving the world.
Follow GUT-FLOP until we notice changes. In the long run you will be better off for it...
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