I just updated my loan pricing model. On average, rebate is 30.1bps worse over the past two days.  The December delivery FNCL 3.5 is 8/32 below its Monday morning open and the FNCL 4.0 is 6/32 cheaper.  So, for the most part, price declines in the primary market match up to the price declines we've experienced in the secondary market but "rate sheet influential" MBS coupons are making a move and there is room for a reprice for the better....

If it were my pipeline and I was running the desk I'd have some extra margin baked into rate sheets to deter originators from locking ahead of the FOMC meeting. I would take this action under the assumption that QEII will drive mortgage rates lower, which would lead to an increase in fallout and greater hedging costs. Or...if I was really a gambler  I might tighten up primary/secondary spreads or reprice for the better to try and draw in a few floaters. But instead of locking I would hold it and wait for 2:15 tomorrow to hedge that deal. That way, when the loan officer comes back and says "I am going to lose that file unless you give me a float down. I could say ok cool, I can be your buddy, I will float you down to current market so you don't lose the deal...but it will cost you 25bps. Some secondary managers might be getting sneaky sneaky, especially in the smaller shops. Texas hedge anybody?

The largest rebate reductions are seen in the most duration sensitive (extension risk) note rates, those at or below 4.25%. Loan pricing is still better than it was last Tuesday.

I am seeing some originator friendly volatility in the basis. MBS valuations are moving in a thinly traded marketplace (LACK OF LIQUIDITY!). Besides the long bond, which appears to be catching a pre-FOMC speculative bid (+1-04. -6.6bps at 3.94%), the rest of the yield curve is back and forth around UNCH on the day. Yet the current coupon just went 3bps tighter and production coupon prices are at their session highs.  This is indicative of an uptick in trading flows/activity...most likely short covering aka position squaring. Once this activity dies down I would expect these gains to be given back.

The Dec. FNCL 3.5 is +0-14 at 100-13. The Dec. FNCL 4.0 is +0-12 at 102-27. Current coupon spreads are off their early session wides, but still UNCH vs. "5pm going out" marks last night.

See comments above re: reprices for the better