Heading into the 5PM "MBS TRADING IS SLUGGISH BECAUSE EVERYONE IS WAITING FOR PREPAY FACTORS" marking period (haha that one is a little long)...the FN 4.0 is -0-03 at 99-13 yielding 4.069% and the FN 4.5 is -0-04 at 101-19 yielding 4.3043%. The secondary market current coupon is 4.128%.
Current Coupon Yield Spreads...
CC vs. 10yr TSY: +87bps
CC vs. 5yr TSY: +188bps
CC vs 10yr SWAP: +69bps
The FN 4.5 has bounced around a 4 tick range all day....101-19 support is holding (for now)
The only excitement of the day came from the Fed and Asian investors who were aggressively buying FN 5.0s on every downtick in TSYs. Trader color was far more...colorful, unfortunately we cannot repeat the phrases used to describe these buying efforts.
That said...here are some random thoughts to consider:
In their latest release, the FHFA made a comment on the composition of credit within the GSE's portfolio...
RE: GSE PORTFOLIOS
"The number of first-lien residential mortgages with credit score at origination of 660 or higher increased, while mortgages with less than 660 credit score at origination decreased. The increase in the number of loans with 660 or higher credit score and decrease in loans with less than 660 credit score at origination reflect actions taken by both Enterprises to increase the credit quality of new business and continues a trend seen over the past year."
We know this already, but the FHFA says delinquencies are still on the rise. That said, to make room for increasing delinquencies, FN/FRE will likely continue to shrink their portfolios (they will take these loans onto balance sheet).
1. Is this the beginnings of FN/FRE becoming a "bad bank"?
2. How will this affect already tight lending/credit conditions and DU/LP risk metrics. Are lending regs going to tighten more???? The obvious outcome: more pressure on FHA to support the mortgage market.
3. Berliner has discussed this in the past...is FICO's model accurately representing credit risk? Is an outdated FICO risk model distorting proper credit underwriting? Does the FICO model need to be re-reformed?
4. Regardless of mortgage rates, we expect that a generally nervous macroeconomic outlook and the well known "roadblocks to qualification" will contribute to a continued slowdown in new loan production. How will less float affect the fate of the GSEs? How will less float affect the value of the Fed's MBS portfolio? (seasoned pools anyone?). The shape of the curve will play a large role in that...but so will credit quality.
Is anyone thinking the mortgage market is going to get super competitive in the months to come? Is anyone nervous that more originators will be forced out of the industry as lending conditions tighten?
Just some thoughts to consider...
Gary Cunningham, former Deputy Assistant Secretary for Regulatory Affairs at HUD, has written RESPA commentary on the Voice of Housing blog channel. Whenever anyone at the Collingwood Group writes something...we read it, you should too!
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