Mark's Blog Report

As expected, rates continued to move higher this week.

- FNMA 6.0% Coupon ........... -- 07/32nds

- FNMA 5.5% Coupon ........... -- 12/32nds

This will equate to an increase of .25-.375 discount cost on today's rate sheets. 

What might seem strange is that there are no economic reports or shocking items of headline news that are pushing rates higher.  Even stocks are moving lower, down over 100 pts currently.  So what gives?  You may guess it's our old nemesis inflation, and you'd be mostly right.  Gold and Oil stay very high while the dollar is very low. 

Bonds hate inflation true, but why is the 10 year note not taking nearly the beating that MBS's are?  That's a much tougher question.  The answer that seems to be most accessible is that traders are concerned with the credit quality of MBS.  That being the case, they view the US treasuries as safer investments for their fixed income needs.  So they buy more of them compared to MBS which increases their price compared to MBS.  I'm not saying that Treasuries' prices are increasing this morning, just that the gap between treasuries and MBS is widening.

It's no wonder this is occurring over the last year with the state of the mortgage market.  Who wouldn't feel less confident buying securities that are backed by shakier assets than they thought?  But the gap has gotten too wide in my view.  Traders are hedging their bets that "mortgage mess" will trickle up into agency paper to greater degree than it already has. 

For those that need an explanation of that sentence, here goes: When I talk about MBS, I'm talking about Fannie Mae, Freddie Mac, and Ginnie Mae MBS, collectively "the agencies."  Paper = debt obligation.  And as far as the "trickling up" phenomenon, I'm referencing the fact that there are many more types of MBS that are backed by sub-prime and Alt-A mortgages.  If you have a pulse, you know subprime and Alt-A, well, they're not doing so good.  So it's a reasonable conclusion that traders might consider the poor performance in those sectors to signal a potentially worse than expected performance in the agency sector.  So MBS gets less attractive and traders prefer treasuries.

This is a good thing in my mind.  Anyone on ground level knows that agencies are taking steps to insure the credit quality of their issuances stays intact.  It's only a matter of time before market perception cools down a little bit and the quality of MBS comes back into the market.  With the 10 year note where it is now, that represents such an unbelievable buying opportunity for MBS.  If we had the quality perception of 3 years ago, rates would be getting close to 4% at this point!!!

I'm not saying this is going to happen any time soon, but as long as Fannie and Freddie keep making it nearly impossible for originators to get loans approved, the credit quality of MBS will stay the same or improve.

On a final note, with fixed income and stocks down on the same day, you know traders are moving money out of the market in preparation for the rest of the week's wild ride.  As I said last week and yesterday, the technical trend calls for higher rates this week, which has proven out nicely yesterday and today.  As far as the parabola that bond prices follow when they are on the move, it usually takes a bit more than a week for it to turn around.  In fact, we could go even higher.  What we can hope for though, as we've talked about quite a bit, is significantly worse than expected economic data.  It seems that, even in the face of inflation, traders will buy MBS when the data is bad enough.  So Friday, with the utterly important employment situation is a day to watch.  We may have a little "back and forth" in bond prices this week and next, but in general I expect them to trend down a bit longer before coming back up.  This means short term lock, medium term float. 

The MBS market slowed down on Monday, but changes may be in the near future. On Tuesday morning, several factors point to good things for MBS.

• The ICSC Store Sales Numbers showed a .4% decrease month over month and the year/year gain of 1.3% last month dropped to 1.0% this month.  This data does not impact the rates too much, but it does not hurt our case for a full-blown recession.  This data coincides with the Redbook release which also showed a modest gain of 1.4%, likely bolstered somewhat by holiday sales.  Weak store sales are another indicator of a slowing economy.  This tends to drive a bit of investment towards fixed income securities which helps mortgage rates stay low.

• The Case-Schiller Home Price Index posted its 19th consecutive drop.  The reading this time was a fall of 11.4% in January, the largest since the index first started reporting in 1987.  The composite index (a broader measure), also fell 10.7%, marking the first time both indexes have crested double digits.

• Yesterday was a fairly "big dipper" for the fixed-income markets as stocks rallied.  This is historically likely after a holiday weekend, but nonetheless, MBS and US Treasuries gave up huge losses.  And why is this point in a list of factors that will have a good impact today?  The pendulum effect, and/or technical analysis.  We've been in a bit of a trend channel for the past week or so with the price of a FNMA 5.5% MBS unwilling to go above a certain amount, but also unwilling to go below.  We approached the lower range of that channel yesterday which, on a purely technical read of the data suggests a greater upward for will be exerted on MBS today.  Think of the price graph line like a rubber band: the farther you pull it from the middle, the more it wants to snap back. 
  
• Consumer Confidence, set to release in 30 minutes, will likely post another decline.  February's Confidence numbers were the worst in about five years, with the "expectation" component reading its worst since 1991.  If we hit or even surpass analysts' estimates of weakness here, it will be a bit of a cold shower for the stock market, and will generally help bonds such as MBS.

More bombs are on the way, and there are more cliffs for the lemmings to test their perceived new-found ability to fly.  It's not going to happen right now, and as long as home prices continue to drop, it would take a miracle of education in financial discipline for the current situation to do ANYTHING BUT continue to drive the consumer into the ground.  One thing the talking heads can seem to agree on is the importance of the consumer to the economy.  Weak consumer, generally, will help MBS for that reason.

The consumer confidence index read at a level of 64.5, down from 75.0 last month.  These numbers have not been seen for many many years and are in line with what economists have considered previous recessions in the US.

Well, this has been an extrememly busy week for me.  Lots of borrowers like you are deciding to not roll the dice anymore and to submit your loans so that they can be ready to lock.  Rates were good last week.  This week has been a little crazy if you have followed the market.  A major bouncing ball week.

There is not much news for the next 3 days: markets closed Friday, no news Monday, and limited news on Tuesday.  So volatility will come largely from "headline risk," that is to say, not scheduled economic reports, but rather financial news headlines.

There's no doubt that Friday is a safe time and a good time to lock.  But will it be the best time for closings taking place in the near term?  Great question.  Next week we have several important reports on the consumer, we have the GDP, Durable Goods report, and several other moderately important reports.

You'll have to go with your gut instinct on this one.  MBS (Mortgage Backed Securities) specific headline risk seems to be favorable recently with the OFHEO announcement, the Bear Bail-Out, and the FHLB proposal, all of which ease liquidity concerns.  So if we continue to operate in that relative vacuum (where MBS respond to broad economic data and stocks as opposed to specific MBS related news), then the economic reports next week should have their normally expected impacts.  For instance, if any given report indicates economic weakness, rates will generally improve.

As far as consumer-related data, my money is on continued weakness.  I believe the week will be economically weak in general, but that is tempered by the suggestion that analysts are slowly becoming more realistic (and pessimistic) and thus the consensus expectations can be set so aggressively that we won't see weaker than expected data on certain reports despite it's weak reading relative to historical data.

With the 5.5% coupon still "hanging out" in that 101-00 to 101-10 range, there is certainly room for it to start what I feel is an almost inevitable trend upward (assuming MBS-Specific headline risk stays minimal).  The spreads to the 10 year UST are still very very high, which means there is room for the MBS to "close the gap" as traders become more comfortable with the actual yield estimates.  I don't think this market is going to get the wind in its sails any time soon.  Combine that with a reasonably large uptick in the DJIA, and there is room for the DJIA to fall a bit next week into a range it is more comfortable with (closer to 12 even) and MBS to improve (again, only the vacuum devoid of negative MBS specific headlines).

My read on the technicals is that we have continued on a steady trend of "bouncing ball" moving upwards along the 50 day moving average price curve.  The next bounce should take us to 102-00 this week if the trend holds, but they are not always reliable.  Still, the "trend is your friend" when it comes to recessionary slides.  We are in one certainly and the trends historically follow a similar pattern that indicates the potential for us to break through our ceiling.  Take a look at the scheduled economic reports for next week and draw your own conclusions based on your bullishness or bearishness.  Strong data - lock today.  If you think the data will be weak, then you do not need to lock right away. 

There has been quite a swing in interest rates these last three days.  Many lender did not update their rate sheets on Monday to reflect the changes in the market.  Some that did, didn't pass down the full change in MBS prices to rate sheets.  But with prices improving yet again this morning, we saw a bigger portion of those changes in the rates today.

As far as economic data, the only scheduled release was MBA mortgage applications which fell 1.9%.  This includes both refinances and purchases.  Taking a look at just the purchase activity, we see a rise in 1.6%, month over month, which is over a 10% decrease year over year.  The reason for the bad refinance numbers - the higher rates in February (compared to January).

Seeing as how it is a light news day which follows a landmark announcement, traders will continue to sit around the campfire and ask each other how they feel about the 200 billion dollar check that Uncle Ben said he'd trade them for some of their mortgage paper.  They were pretty stoked about it yesterday including the rest of the economy apparently. 

If you didn't catch yesterday's news, the Fed announced a Term Securities Lending Facility to make 200 bil available in liquidity.  What it amounts to is the Fed allowing MBS holders to buy treasuries with their MBS holdings.  This does not mean that Fannie and Freddie are turning into Ginnie, but they are certainly shopping at the same stores.

It will be interesting to see how this stop-gap plays out.  The hope is that, putting a band-aid on liquidity and quality problems in the MBS market will stimulate enough loan activity to ameliorate the housing and mortgage component of the current recession (yeah I said it).  But until quality is proven and/or realized on a broader level, the liquidity cannot return of it's own accord.  And if Fannie and Freddie go out and blow their allowance on more bad mortgages, Uncle Ben might not be so generous next time.