MBS Pricing Snapshot

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) finalized rules to facilitate access to credit by creating specific exemptions and modifications to the CFPB’s Ability-to-Repay rule for small creditors, community development lenders, and housing stabilization programs. The amendments also revised rules on how to calculate loan origination compensation for certain purposes. Today’s final rule amends the CFPB’s Ability-to-Repay rule, which was finalized in January of this year.

“Our Ability-to-Repay rule was crafted to promote responsible lending practices,” said CFPB Director Richard Cordray. “Today’s amendments embody our efforts to make reasonable changes to the rule in order to foster access to responsible credit for consumers.”

The CFPB finalized its Ability-to-Repay rule on January 10, 2013. The Ability-to-Repay rule established that most new mortgages must comply with basic requirements that protect consumers from taking on loans they do not have the financial means to pay back. Lenders are presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages” (QMs). These loans must meet certain requirements including prohibitions or limitations on the risky features that harmed consumers in the recent mortgage crisis. If a lender makes a Qualified Mortgage, consumers have greater assurance that they can pay back the loan.

"Benefits of this accommodative monetary policy program still significantly outweigh the costs. While some improvement in labor markets has been achieved, it does not yet constitute progress sufficient to merit halting the asset purchase program."

"As for the costs, the Fed is and should be very attuned to unintended consequences – and is intently monitoring an array of asset prices, including stock prices, housing prices, and other widely held assets. At this point it seems that fundamentals are prevailing, and potential costs are well contained."

I also believe that the Federal Reserve should make adjustments to the program based on economic outcomes – that if the economy and the outlook improve, the rate of purchases could be gradually reduced, rather than suddenly stopped once we have achieved substantial improvement in labor markets. By the way, a reduction is one possibility, but of course adjustments could be down or up – because if the incoming economic data do not reflect improvements consistent with both elements of our dual mandate, I believe the Fed should be willing to increase asset purchases. "

"Changing the flow of purchases does not necessarily yield, in the end, a smaller central bank balance sheet. "

"In terms of monetary policy, it would in my view be premature to stop the Fed’s large-scale asset purchase program at this time. I believe the Fed should continue the purchase program until we see more sustained improvement in labor markets and have greater confidence that the economic recovery is sufficiently self-sustaining to yield continued progress in reducing the still very high unemployment rate. "

"The bottom line is that we really need to see the economy grow, as I hope and expect, more quickly than at the 2.1 percent growth rate it has averaged over the recovery. Faster growth is essential to attaining inflation and employment outcomes consistent with the Federal Reserve’s dual mandate from Congress – and more broadly for the economic wellbeing of the many Americans who have struggled through a long and slow recovery."

MBS and Treasuries took a few deep breaths after the 5yr auction came in broadly in line with previous averages and then began to rally. 10's broke a resistance floor that had been giving them some trouble earlier this morning (and even right up until the auction) and it looks like we're off to the races since then.

That was about 3 minutes ago and MBS are up another 5 ticks and change with Fannie 3.0s up 15 on the day at 100-24 and Fannie 3.5s up 9 ticks at 103-25. Positive reprices are more likely at these levels if we hold them. 10's are down nearly 4 bps on the day at 2.13.

At present, 5yr yields are net negative on the day while 30yr yields are about 6 bps lower. This is yield curve 'flattening,' and it is happening in response to the massive amounts of steepening seen so far in May and especially yesterday.

Whether rates will ultimately bounce at yesterday's highs or continue higher, these pauses for consolidation tend to happen either way. Frequently, they result in improvements from the weakest points of the previous session. Fannie 3.5's would need to break 103-24 before this would be anything more than a consolidative move.

That said, the consolidative move isn't a bad thing for now. 3.5's are up 5 ticks at 103-21 and Fannie 3.0s are up 11 ticks at 100-20. One positive reprice has been reported and more are possible, but not likely to be widespread at current levels.

The 5yr auction is coming up at 1pm and is a bit tricky, as it speaks to the "belly" of the curve (vs the "long end" or "short end," referring to 10yr and 30yr yields vs 3yr and 2yr yields respectively). Given the current state of flux in the MBS Coupon stack, the auction results may merely serve to affect the spread between Fannie 3.0s and 3.5s more so than the outright trading levels.