The Day Ahead: Basking In QE3 Afterglow, Enduring A Busy Morning Of Data

After yesterday's massive QE3-inspired rally took production MBS to NEW ALL TIME HIGHS, it might seem a bit anticlimactic to wade through a relatively busy Friday of economic data.  Indeed the critical factor in "the day ahead" (and probably even in the week ahead) has more to do with the day just passed.  In other words, observing the tradeflow patterns and preferences in response to the MBS-specific QE3 is more interesting than the average economic release today.
To set some sort of baseline, we'd say that we think markets did an extraordinarily good job of processing an epic day of transparency, communication, and utilization of policy tools.  The announcement delivered on both of the market's expectations in that it A) was open ended and B) extended the ZIRP verbiage.  The fact that it neglected Treasuries, preserved MBS reinvestments, AND added additional non-sterilized MBS purchases to the mix means that the Fed is essentially now TWICE AS BIG a sponsor of MBS as before.  Regardless of our skeptical long term views on this band-aid, it's very soothing in the short term.
And it's not even that mortgage markets were in need of soothing, per se.  Rather, the Fed knew they wanted to do "something," and it didn't make much sense to target Treasuries for a few reasons (their buck buys a bigger piece of the MBS pie and they're running low-ish on twistable Treasuries).
If you'd told us yesterday morning what the Fed's plan would be, the easy part to call would be the tightening of MBS to Treasuries. Tightening refers to the yields of MBS and a comparable duration Treasury security getting closer together.
  If 10 yr yields held in the low 1.7's by yesterday's close and MBS yields fell about 15bps from, say, 2.65 to 2.50, MBS yields would now be much tighter to Treasuries.
These spreads bottomed out in mid 2009 and 2010 and had slowly crept up until the Fed announced Operation Twist last summer and began reinvesting MBS income back into new MBS purchases. Spreads never made it back to historical lows however, and had essentially drifted slowly wider to some of their higher level of the past 3 years (still nothing compared to the pre-Fed days).  Yesterday's QE sent spreads tighter than they've been, EVER.
The harder thing to know about QE3 is where bond markets would generally trend.  To that end, we find the 10yr yield not quite as high as it had been in mid August and not quite as low as it had been during any other part of the summer.  1.7's in 10yr yields "feels" about right for a global market with some European hopium (that gets us up out of the 1.5 area), but still with plenty of risks that the hopium turns out to not do the trick (that keeps us from definitively re-entering the 1.80-2.1 range that dominated much of the past 12 months. In short, the market's reaction makes a lot of sense.
It will be interesting to see what sort of effect today's economic data will have after yesterday's news. The normally big Retail Sales report hits at 8:30am along with Consumer Prices.  Industrial Production arrives at 9:15am and Consumer Sentiment Prints at 9:55.  European finance ministers will be meeting to discuss whether or not Spain should request a bailout from the ECB, an event that has as much potential to affect trade as anything else today.

MBS Live Econ Calendar:
Week Of Mon, Aug 27 2012 - Fri, Aug 31 2012
Time	Event	Period	Unit	Forecast	Prior	Actual
Mon, Sep 10
15:00	Consumer credit	Jul	bl	9.05	6.46	--
Tue, Sep 11
08:30	International trade mm $	Jul	bl	-44.0	-42.9	--
13:00	3-Yr Note Auction	--	bl	32.0	--	--
Wed, Sep 12
07:00	MBA Purchase Index	w/e	--	--	178.4	--
07:00	Mortgage refinance index	w/e	--	--	4216.0	--
08:30	Export prices mm	Aug	%	0.1	0.5	--
08:30	Import prices mm	Aug	%	1.5	-0.6	--
10:00	Wholesale inventories mm	Jul	%	0.2	-0.2	--
10:00	Wholesale sales mm	Jul	%	0.9	-1.4	--
13:00	10-yr Note Auction	--	bl	21.0	--	--
Thu, Sep 13
08:30	Producer prices mm	Aug	%	1.3	0.3	--
08:30	Producer prices, core mm	Aug	%	0.2	0.4	--
08:30	Initial Jobless Claims	w/e	k	370	365	--
08:30	Continued jobless claims	w/e	ml	3.32	3.322	--
11:30	30-Yr Bond Auction	--	bl	13.0	--	--
12:30	FOMC rate decision	N/A	Â	--	Â	--
14:00	FOMC Member Forecasts	N/A	Â	--	--	--
14:15	Bernanke Press Conference	N/A	Â	--	--	--
Fri, Sep 14
08:30	Core CPI mm, sa	Aug	%	0.2	0.1	--
08:30	CPI mm	Aug	--	0.5	0.0	--
09:15	Capacity utilization mm	Aug	%	79.3	79.3	--
09:15	Industrial output mm	Aug	%	+0.1	0.6	--
09:55	U.Mich sentiment	Sep	--	74.0	74.3	--
10:00	Business inventories mm	Jul	%	0.3	0.1	--
* mm: monthly | yy: annual | qq: quarterly | "w/e" in "period" column indicates a weekly report * Q1: First Quarter | Adv: Advance Release | Pre: Preliminary Release | Fin: Final Release * (n)SA: (non) Seasonally Adjusted * PMI: "Purchasing Managers Index"

Mortgage Rates Tumble To Recent Lows Following Fed Announcement

Mortgage rates abruptly lower today after the Fed unveiled a third round of large-scale asset purchases known as quantitative easing or QE3.  Although the dollar amounts announced today are smaller than QE1 and QE2, the Fed deviated from past easing announcements and opted for open-ended buying this time.  Not only that, but the buying is exclusively in Mortgage-Backed-Securities (MBS), unlike previous iterations which have had significant Treasury components.

Logically, this is a bigger benefit for mortgage markets than for Treasury rates, and this has certainly been demonstrated today.  Despite Treasury yields barely making it back to yesterday's levels, Mortgage Rates have fallen significantly, bringing them to their lowest levels in over a month and edging back toward ALL-TIME LOWS. This puts the 30yr Fixed Best-Execution Rate somewhere between 3.5% and 3.375% depending on the lender.  It certainly remains much closer to 3.5% today, but lenders can't react instantaneously to the full amount of movement seen in the underlying MBS market.

(Read More:What is A Best-Execution Mortgage Rate?)

The bottom line is that today had the potential to be a BIG DAY in either direction, and we ended up getting the positive version of that potential.  In the past, markets have also reacted positively to similar new, but reversed course shortly thereafter.  We don't have any reason to believe that that will be the case this time, but bring it up as a reminder that today's triumph doesn't guarantee tomorrow's victories. 

That having been said, today was a new sort of triumph for the mortgage world.  Bernanke paid extra attention to the topic, referring to housing as the piston that hasn't been firing during the recovery.  It's clear that the entire FOMC agrees or else they wouldn't single-out mortgage-backed-securities for quantitative easing in the current environment.  It means much more now than it did when MBS were fragile and near death compared to Treasuries back in 2008. 

Temporary Note On G-Fee Hikes: This is something that's happened before and is something we know will continue to happen (read more HERE), but it doesn't make the effects on rate sheets seem like any less of a shock when they arrive.  Lenders have been adjusting their pricing policies more quickly in response to this most recent hike and it has generally been enough to push most scenarios up to the next .125% higher in rate.  In our view, this is a MUCH bigger consideration than trying to time highly uncertain financial markets.  Bottom line, if you can unequivocally confirm that you're working with a lender who has not yet priced in the Guarantee Fee increase, and that your loan is on a timeline that risks being affected by it, we'd certainly favor locking in those scenarios (not to mention making sure your lender has everything they need to get your loan done without the need for a lock extension, because those are getting much more expensive in some cases if they cause the time frame on the file to cross into the higher Guarantee Fee territory).

Long Term Guidance: While the recently high degree of uncertainty remains very much intact, the Fed's decision to specifically target Mortgage-Backed-Securities in a third round of Quantitative easing provides a supportive undertone for mortgage rates.  We'd still advocate not trying to get too far ahead markets.  In other words, we wouldn't try to guess how low or how high rates might go before changing course.  For now, the trend is supportive and positive for rates, but we're watching it closely for the same sort of paradoxical responses that occurred in 2010.  Things look different this time around, but a lot of that has to do with Europe.  Rates remain near all time lows and risks of volatility remain high.  Those factors suggest that you stay vigilant regarding the day-to-day swings in mortgage rates.  If you're floating, set a limit as to how high rates would have to go before you cut your losses and locked.  Similarly, set a target of how low rates would have to get before you lock.  

Today's BEST-EXECUTION Rates 

• 30YR FIXED -  3.5%
  
• FHA/VA - 3.5% (varies more between lenders than conventional 30yr Fixed)
• 15 YEAR FIXED -  2.875-3.00%
• 5 YEAR ARMS -  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations 

• Rates and costs continue to operate near all time best levels
• Rates could easily move higher or lower, but given the nearness to all time lows, there's generally more risk than reward regarding floating
• But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn't always mean they're done improving.
• (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).
  

MBS MID-DAY: Steady At Weaker Levels Following German Court Decision

The entire shape of trading this morning seems to have been dictated by the German court decision, as expected.  Also as expected, were the details of the decision itself, with the court approving the ESM, but with a set of generally palatable conditions.  As we noted in the morning alert, if anything, it was a little less restrictive than it might have been, thus producing a moderate rally for risk markets and selling pressure for bonds.  MBS kicked off the day about an eighth of a point weaker from post-roll pricing (in other words, the charts look like we fell further due to the roll).  Since bottoming out in the morning hours, we've been holding ground for now and Treasuries have held their ground at 1.76 just after the domestic stock open.  We'd note that 1.76 isn't much of a technical level so we're still poised to go either direction today, but with the 10yr auction this afternoon and FOMC tomorrow, we're not expecting epic swings (though if the 10yr auction surprises in one direction or another, it could help us resolve whether we're heading to the 1.80 technical level in 10's or 1.69.  MBS should stay relatively insulated in the case of a major sell-off given the generally high expectations of an MBS mention in tomorrow's FOMC festivities).

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

Pricing as of 11:06 AM EST

Morning Reprice Alerts and Updates

Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

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9:01AM  :  ALERT ISSUED: Bond Markets In Weaker Territory Following German Court Vote

Treasuries and MBS opened in weaker territory after Germany's Constitutional Court approved the ratification of the ESM. The approval was expected, however, and so it was the conditions of the approval that markets have been waiting for. If the conditions made things seem general "tougher to get done" with respect to using the ESM to provide liquidity to troubled Euro-zone states, bond markets likely would have reacted more positively. But as it stands, there aren't any major surprises among the conditions, and at first blush, they actually seem a bit tame.

Markets reacted in logical fashion with Euro stocks gaining and bond markets selling off at a medium pace. The whole experience runs the risk of being anticlimactic though, considering we're only up 4 bps in 10yr Treasuries and down only 7 ticks in Fannie 3.0 MBS (NOTE: the chart may look like we opened down much more than 7 ticks, but that's due to The Roll. Basically, September coupons occupy the left side of the chart while October Coupons have the right, at least for Fannie and Freddie 30's).

The morning's data at home--Import and Export Prices--passed without a trace, leaving the cash stock market opens as the next interesting event, followed by the relatively uninteresting Wholesale Inventories at 10am. The next decidedly interesting event on the calendar is the 10yr Treasury Auction at 1pm.

8:43AM  :  ECON: Import Prices Lower Than Expected. Exports Higher

- Import Prices +0.1 vs +1.4 consensus
- Exports Prices +0.9 vs +0.3 consensus
- Petroleum +4.1 vs -2.1 in July
- Non-petroleum prices -0.2 in August, -0.9 year-over-year

U.S. import prices rose 0.7 percent in August, the U.S. Bureau of Labor Statistics reported today, after declining 0.7 percent the previous month. The August increase was the first advance in overall import prices since a 1.4 percent rise in March. Export prices also increased in August, rising 0.9 percent following a 0.4 percent advance in July.

Live Chat Featured Comments

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Michael Gannon  :  "so let me get this.....Fannie/Freddie are raising their costs and taking the necessary steps to become a non subject while FHA keeps increasing their fees to cover shortages which I get, but in turn will make it impossible to have a refinance make sense all the while raising the cost for a home buyer which in turn with tough uw standards will lower home prices. all the while indirectly making lenders write less FHA volume which will affect their compare with a drop in volume which in turn will "

Jason York  :  "so are you saying it would be a tier system like they used to have it?"

Andrew Russell  :  "►Give HUD the authority to charge up to a maximum premium of 2.05 percent annually on mortgage insurance (MI); ►Establish a minimum annual premium for MI of 0.55 percent; ►Bar unscrupulous lenders from participating in the program; ►Require repayment of losses to FHA by lenders who committed fraud; ►Improve the FHA’s internal financial controls, transparency, and disclosure requirements; and ►Require the Government Accountability Office (GAO) to conduct an independent safety and soundness r"

Steven Klodzin  :  "I havent read it enough, but it almost looked like the sovency act would allow premium changes on exsisting FHA mortgages. I just read it briefly though so i may be way off."

Steven Stone  :  "but they are going to cause another bailout to be required"

Steven Stone  :  "no i dont think thats it...they dont want another bailout"

Jude Bridwell  :  "Problem is you have people making laws up there that can afford anything they want. They don't think about how it may affect the average Joe."

Steven Stone  :  "and one thing i have learned is that when you are running a ponzi scheme, you do whatever you can to bring in more money...you dont raise prices."

Steven Stone  :  "but what they do not realize is that the FHA does not operate in a vacuum"

Steven Stone  :  "im thinking it means they are trying to raise the premiums again"

Michael Gannon  :  "can someone decipher this FHA solvency act for me please since Im a bit slow and cant seem to grasp myself "

Jeff Anderson  :  "So somewhere around 103 form MBS'. Got it. Thanks."

Matthew Graham  :  "MBS, 103, 103, and 103 on the downside, 103-10 and 103-14 upside"

Matthew Graham  :  "in terms of 10's, 1.798 and 1.86 on the weak side. 1.69-ish continues to be the challenge on the positive side since y'day afternoon."

Jeff Anderson  :  "GM, MG. What do you see for key pivots today?"

Matthew Graham  :  "RTRS - U.S. AUGUST NON-PETROLEUM YEAR-OVER-YEAR IMPORT PRICE DECLINE STEEPEST SINCE NOVEMBER 2009 "

Matthew Graham  :  "RTRS- U.S. AUGUST IMPORT PRICES INCREASE FOR FIRST TIME IN 5 MONTHS "

Matthew Graham  :  "RTRS - U.S. AUG IMPORT PRICES +0.7 PCT (CONS. +1.4 PCT) VS JULY -0.7 PCT (PREV -0.6 PCT) "

Victor Burek  :  "starts today..i locked a couple yesterday, but have quite a few floaters"

Brayden Alexander  :  "Thx vb. meeting begin today right? Vb sails hoisted?"

Victor Burek  :  "announcement tomorrow"

Brayden Alexander  :  "Gm all. FOMC today or tomo?"

Jeff Anderson  :  "Seems like the market kind of had the court rulings priced in already IMO? Conditions weren't over the top, but let them know where they stand kind of?"

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MBS RECAP: Over Before It Began

Bond markets simply languished sideways to slightly weaker today after walking in the door already in the hole.  A majority of the movement in broader bond markets occurred in the wee hours after the 4am announcement of the German court decision on the ESM.  Market participants didn't expect the decision to, in some way, disallow the ratification of the ESM (Europe's permanent bailout fund, the "European Stability Mechanism), but were curious to see what conditions would be attached to Germany's participation.  Every other Euro zone country has signed off.  As it turns out, the conditions were on the lighter side of expectations.  Either that or risk markets simply experienced a relief bid at the relatively uneventful completion of this big-ticket event.  After the selling overnight, bond markets didn't move much throughout the day, but what little movement we got was generally into weaker territory for Treasuries and sideways for MBS.  Tomorrow is the grand finale of this stretch of big-ticket events that began with last week's ECB Announcement and NFP report.  The FOMC Announcement is released at 12:30pm Eastern Time followed by forecasts at 2:00pm and the Bernanke Press Conference at 2:15pm. 

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

Pricing as of 4:04 PM EST

Afternoon Reprice Alerts and Updates

Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

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1:21PM  :  ALERT ISSUED: Bond Markets Slightly Weaker After 10yr Treasury Auction

While the short end of the yield curve continues to be pinned down, the longer end continues flapping in the wind (generally in an unfriendly direction). The 10yr Auction has merely added fuel to this fire--not much, but enough to nudge yields to their highest levels of the day and push MBS in line with their lows.

In and of itself, the auction could have been worse. The 2.85 bid-to-cover ratio was in line with broader averages, but on the weak side for a "reopening." The auction's stopping yield was also weaker than markets were expecting. Rather than going by any sort of forecast, the expectations for the auction's stopping yield are clearly broadcast by the "when-issued" market. This auction's yield was 0.7 bps higher than the 1pm when-issued yield, one of only 3 out of the last 10 auctions to stop at a higher yield.

There was an obligatory push in volume, but it didn't rival the stir created by the German court news overnight. That was the bigger push toward weakness with this lousy auction simply not getting in the way. We're essentially leading-off in as defensive a position as possible ahead of tomorrow's FOMC festivities.

That said, it's not runaway, "panicky," weakness... More like "just as much weakness as markets can fit in without it seeming overdone." MBS are doing a good job of holding their ground into Treasury selling, as expected. The negative reprice risk outlook is a bit uncertain, but certainly, we'd note that actual price levels are no worse than rate-sheet time. Still, we can't help but feel a bit guarded when prices move lower following a 10yr Auction.

Bottom line, vigilance is increased, but at Fannie 3.0s continue to hold their ground at 103-06 or better, we'd probably not be hitting the panic lock button just yet. The other side of this coin is that we're not sure why we'd wait to lock unless we were planning on floating into FOMC tomorrow.

Live Chat Featured Comments

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Andy Pada  :  "I thought the low rate language was already "sort of" dismissed since Chairman Bernanke's tenure ends in 2015 (or sooner if Romney gets elected)"

Victor Burek  :  "we also have the low rates language..what impact might it have"

Christopher Stevens  :  "I would think the 10YR as well as MBS market has priced in some expectation for QE3. The question is will the action the Fed announces be more or less than the market anticipated. If it is less watch out."

Victor Burek  :  "seems buying treasuries woudl be best since mbs woudl follow and our govt needs to borrow a lot more money"

Ted Rood  :  "Not to mention lenders pricing off pipeline control and "improved" profit margins rather than on gross prices of MBS......."

Andy Pada  :  "It seems that every time QE is announced there is an initial drop in yield (if I read the article correctly). So if there is no announcement, would this lead to sell off in equities and at the very least, not hurt interest rates? Seems we may be in a pretty good position. Any thoughts?"

Victor Burek  :  "but what would be best for our overall economy..buy mbs or buy treasuries?"

Victor Burek  :  "gonna be interesting to see what happens tomorrow..but consumers should play safe here"

Christopher Stevens  :  "AP here is a good article regarding QE1/QE2 and rates http://www.frbsf.org/publications/economics/letter/2012/el2012-16.html"

Andy Pada  :  "I recall that actual day of QE2 implementation and subsequent days, rates got higher. or was that QE1"

Andy Pada  :  "day of and the next couple of days"

Andy Pada  :  "Can someone validate: rates improved when the Fed announced QE2?"

Scott Valins  :  "you have to do appraisal on vacated property"

Scott Valins  :  "BK is correct just closed one"

Bromi Krock  :  "if they have 30% equity or more in the property you should be able to use the rental income. You will need a signed lease agreement as well as first month/deposit in hand before close."

Brent Borcherding  :  "Any scenario where someone with NO landlord history can get a lease on the property they are vacating and use a portion of income for qualifying for new primary purchase? I believe the answer is no...but am getting conflicting info."

Andy Pada  :  "So we beat on, boats against the current, borne back ceaselessly into the past."

Matthew Graham  :  "in the day ahead http://www.mortgagenewsdaily.com/mortgage_rates/blog/274253.aspx"

Matthew Graham  :  ""Then the 10yr auction--normally a very big deal--arrives at 1pm. This could still be a very big deal, but if we had to pick one 10yr auction this year to be overshadowed by the juxtaposed market events, this would be it. As such, it will take a fairly big miss in terms of the auction's stopping yield vs the 1pm "when-issued" yield in order to register a significant response.""

Andrew Horowitz  :  "yup"

Jeff Anderson  :  "Honey crisp much better. Bond traders taking a wait and see for tomorrow stance?"

Andrew Horowitz  :  "c- c+ honey crisp to Macintosh no real difference"

Victor Burek  :  "santelli gave it a c+"

Matthew Graham  :  "C- give or take"

Matthew Graham  :  "so a .7 bps tail on weaker than average cover"

Matthew Graham  :  "WI was at 1.757"

Matthew Graham  :  "RTRS- U.S. 9-YR 11-MO NOTES BID-TO-COVER RATIO 2.85, NON-COMP BIDS $15.04 MLN "

Matthew Graham  :  "RTRS- U.S. SELLS $21 BLN 9-YR 11-MO NOTES AT HIGH YIELD 1.764 PCT, AWARDS 4.46 PCT OF BIDS AT HIGH "

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Why the Recent G-fee Increase? Why the Annual Fannie Sales Cap? Will There be More?

Why the Recent G-fee Increase? Why the Annual Fannie Sales Cap? Will There be More?

The U.S. Government now has a $16 trillion deficit. On the other hand, it made about $12 billion on the AIG stock sale - congrats. To put those numbers in context, however, the government would have to do an AIG deal every day, seven days a week, for nearly four years in order to erase the current deficit.

As John Steinbeck famously said, the problem with poor Americans is that "they don't believe they're poor, but rather temporarily embarrassed millionaires." Has the housing market been "temporarily" down? One can never overestimate the intelligence of the masses, but the Financial Times reports that "Americans' confidence in the outlook for the housing market has risen and they believe home prices will continue to rise in the next year, according to a new survey by Fannie Mae." Better than believing otherwise, right? "A rising number of people predicted mortgage rates would go up in the next 12 months, up to 40% last month from 36% in July, while those who felt it was a good time to sell property increased to 18 per cent from 16 per cent. The number of people surveyed who predicted house prices would increase remained steady in August at 35%, but was up from 20% a year ago. Americans expect house prices will rise on average by 1.6% in the next year."

The industry continues to wring their collective hands over the guarantee fee increase. (I've been in the biz so long, I remember when there was a "guarantee fee" and a "guarantor fee", depending on the agency.) I received a note from an industry vet, saying, in part, "The biggest fear in our industry right now is not rising rates but that FNMA and FHMLC, already in receivership, have been given a death sentence with no chance of parole. It sadly appears to many of us that, no matter how reformed and beneficial the GSE's are to the health of housing market and our economy in general, they are going to subjected to a slow and painful death. The lethal injections may have already been started."

The note continued. "Case in point, the latest G-fee increase of .125% has already added a full 50 bps to our price on 60 day locks. I have also heard that FNMA that they are also capping the amount of loans that new FNMA approved seller/servicers can send directly to FNMA by capping production at 20x their net worth. So, for example, if we have a net worth of $10 million, we can only sell FNMA $200 million for the entire year. But we just closed nearly $100 million in August alone so we have no choice but to send in loans as a correspondent to the aggregators, and they in turn service the loans, steal our customers, and sell to FNMA without those caps in place as they are an established seller servicer. But wait, the fun doesn't end! With the impending Basel III reserve requirements possibly hitting even the 'too big to fail banks' in the upcoming years, there is a fear that they too will start to shrink their loan balance portfolios. This redirects us to sell loans to the agencies, which have us capped out!"

Here are my thoughts on this.  First, a clarification that the gfee increase may result in approximately 50 basis points difference in price, not rate (using a 4x1 multiple).

Second, FHFA indicated that the gfee increase was intended to help flatten out the price difference between big and small lenders. If the average is 10 basis points, and the large aggregators saw 12, that means to move back to the average, by my simple calculations, plenty of "smaller guys" will see less than 10.

Third, the guarantee fee is intended to cover expected risk inherent in eligible deliveries.  Even at the current gfee levels, it was generally agreed that Fannie & Freddie have been underpricing the risk on eligible loans, with support of the Government and FHFA wanted that to change.  (More on how g-fees are set, and some theories about possible future increases, below.)

As it relates to these repurchases, no one is going to disagree that lender have to be financially able to repurchase ineligible loans. If you don't think monitoring counterparty risk is a huge issue, just ask the CFPB, or Capital One after it paid some hefty fines for exactly that issue. Fannie needs to manage counterparty risk, and one way to do that is by limiting deliveries based on net worth and other factors. The 20:1 ratio you reference, based on net worth, is known to be merely a starting point.

But folks are asking, "How was the delivery limit set?" It appears that Fannie took, as a starting point, the net worth of the company. For newly approved lenders, it is hard to gauge what future deliveries will look like, but for more seasoned lenders, profile of deliveries and any outstanding obligations (such as loans not repurchased) get factored into the limit.  Lenders who have delivered a better book of business to Fannie are rewarded with a higher sales cap.

So what if you don't like the 20x1, or whatever ratio you might have, what can a lender do? Call Fannie Mae and talk with them about it. Another is to (gasp!) keep your earnings in the firm rather than taking them out.  Per the MBA, independent mortgage banks' margins are very good (http://www.mbaa.org/NewsandMedia/PressCenter/81793.htm), so now is a great time to bump up the net worth of the company. Owners pulling out large chunks of capital in order to shield it from potential liabilities down the road may see this strategy backfire with lower delivery limits based on that reduced net worth. Another strategy is to be willing to post collateral as an alternative to increasing net worth.  I've heard that putting some of that liquid net worth into an escrow/custodial account might increase whatever delivery limit is set.

So, don't be afraid to have a conversation with Fannie about your limits. And by the way, with all this talk about Fannie, let's not forget Freddie. My guess is that the FHFA gave both agencies directives, and how Fannie and Freddie implement is up to that particular agency. So watch for Freddie to come out with something similar.

Returning to the g-fee hike, how did the FHFA arrive at that level of increase, and how will increases be determined in the future? The FHFA, looking at Freddie & Fannie's portfolio performance, realized there were performance issues based on maturity, FICO, LTV, and several other factors. Underwriters knew this already, right? Most analysts who follow such things think that the G-Fee hikes should be positive for lower coupon 30 year pools, which will experience the biggest valuation upside. Although the FHFA has not announced full details, the market anticipates fee hikes on weaker credit borrowers, which should increase the price for existing pools so investors liked the news, even if lenders and borrowers did not: investors will hold onto the higher yielding pools longer. (Although just like we saw in March, the market will see a rush of refi's ahead of various investor deadlines, which in turn are based on how long it takes to pool and securitize the loans.)

Returning to the nitty-gritty, the g-fee hikes will reduce cross-subsidization of high risk loans by increasing pricing for loans with maturities greater than 15 years. The cash window will implement these changes for commitments starting on November 1. Differences in g-fees between lenders delivering large volumes to the GSEs and smaller lenders will also be reduced. Folks "in the know" say that separately, the FHFA will also publish a proposal for state level pricing for public input.

But all this still begs the question, "What is a private market g-fee?" Under the Housing and Economic Recovery Act of 2008, the FHFA is required to conduct annual studies of the g-fees charged by the GSEs and submit a report to Congress. The FHFA uses loan level data from the GSEs segmented by product type, LTV, credit score, and size of lender for the purposes of this report. Each agency's proprietary costing model is then used to estimate cost due to guarantee payments and the expected return on capital. "Private money" does not necessarily have access to this data. For F&F, the current and future g-fee is based on the projected g-fee cash inflows: is fee income sufficient to offset the cost involved in guaranteed loans, as well as the required return on capital. Makes sense to me, although one can only guess at the exact "private money gfee."

Traditionally, smaller lenders pay higher g-fees due to the perceived higher cost of doing business with them. MBS hedging costs borne by the GSEs (as smaller lenders are more likely to deliver to the cash window), liquidity disadvantages, higher effect of fixed administrative costs, and higher counterparty risks are included in those costs. And historically larger lenders are also usually able to negotiate down their g-fees: U.S. Bank does not have the same g-fee as Rob's Home Mortgage and Laundromat. But recent reports show that the higher fees charged of smaller lenders are disproportionate to the higher costs. In the future, don't be surprised if the agencies come out with either an entirely different structure, or take the current structure and use more loan-level price attributes to set the g-fees to better model the risk.

By the way, yesterday the commentary mentioned the new rep & warrant framework that clarifies future liabilities (read: reasons lenders are asked to buyback loans). Here is the actual announcement.

Turning to the temporal markets, Tuesday saw little change in prices (the 10-yr was down about .125 and closed at 1.70% and agency MBS prices were worse about 1/16 in price) on less-than average volume. Chatter in the press focused on the 3-yr auction (just fine), today's $21 billion 10-yr auction, and miscellaneous news from Europe. Today begins one of the periodic Federal Open Market Committee meetings ("ok...who took the last jelly glazed...Ben wanted it!") and the market seems to be positioning for QE3 information from the Fed later this week: mortgage pricing is doing better than Treasury pricing.

In the early going, unfortunately, rates have edged higher: the 10-yr has crept up to 1.74% and MBS prices are worse by .125-.250.

An American tourist in London decides to skip his tour group and explore the city on his own.
He wanders around, seeing the sights, and occasionally stopping at a quaint pub to soak up the local culture, chat with the lads, and have a pint of the Local Favorite.
After a while, he finds himself in a very high class neighborhood - big, stately residences - no pubs, no stores, no restaurants, and worst of all... NO PUBLIC RESTROOMS.
He really, really has to go, after all those Brews.
He finds a narrow side street, with high walls surrounding the adjacent buildings and decides to use the wall to solve his problem.
As he is unzipping, he is tapped on the shoulder by a London Bobbie, who says, "Sir, you simply cannot do that here, you know."
"I'm very sorry, officer," replies the American, "but I really, really HAVE TO GO, and I just can't find a public restroom."
"Ah, yes," said the Bobbie "Just follow me." He leads him to a back "delivery alley," then along a wall to a gate, which he opens. "In there," points the Bobbie. "Whiz away... anywhere you want."
The fellow enters and finds himself in the most beautiful garden he has ever seen.
Manicured grass lawns, statuary, fountains, sculptured hedges, and huge beds of gorgeous flowers, all in perfect bloom.
Since he has the cop's blessing, he zips down and unburdens himself and is greatly relieved.
As he goes back thru the gate, he says to the Bobbie, "That was really decent of you - is that "English Hospitality?"
"No," replied the Bobbie, with a satisfied smile on his face, "that is the German Embassy."

Mortgage Rates Flat To Slightly Higher Ahead Of Week's Major Events

Mortgage rates are somewhat higher again today after news out of Europe created market momentum overnight in favor of higher stock prices and higher bond yields.  When bond yields move higher, mortgage rates are generally moving higher as well although today's rates did a fairly good job of holding steady at the prevailing best execution rate of 3.5% for 30yr Fixed Conventional Loans.  

(Read More:What is A Best-Execution Mortgage Rate?)

The overnight news in Europe was an announcement by the highest court in Germany that a key vote would NOT be delayed, and thus will occur tomorrow.  Although the German judicial system may seem miles away from the world of mortgage rates here in the US, this vote is on Europe's new permanent bailout fund and has the potential to be a very important market mover.  It's not that the decision directly affects mortgage rates, but it has a huge bearing on the overall direction of markets.  As the securities that underlie mortgage rates tend to move mostly in concert with similar bond market securities, mortgage rates can definitely be affected.

This is one of the "Big Ticket Events" to which we've been referring for a few weeks now, and along with the Federal Reserve's policy announcement on Thursday, represents a huge dose of uncertainty for interest rates.  The potential volatility ahead is one part of the current consideration "should I lock or float?"  The other ingredients, as we see them, have to do with where rates are historically as well as some specific but highly quantifiable threats.

Historically, rates continue to operate in a range near their all-time lows.  There have maybe been a few days in late July where it could have been argued that rates dipped to a 3.375% best-execution level, but beyond those days, most of the recent movement has simply been adjustments in closing costs (or lender credits) at the 3.5% level. 

As far as the "specific, quantifiable threat," we're speaking about the most recent hike in Fannie Mae and Freddie Mac's Guarantee Fees.  This is something that's happened before and is something we know will continue to happen (read more HERE), but it doesn't make the effects on rate sheets seem like any less of a shock when they arrive.  Lenders have been adjusting their pricing policies more quickly in response to this most recent hike and it has generally been enough to push most scenarios up to the next .125% higher in rate.  In our view, this is a MUCH bigger consideration than trying to time highly uncertain financial markets.  Bottom line, if you can unequivocally confirm that you're working with a lender who has not yet priced in the Guarantee Fee increase, and that your loan is on a timeline that risks being affected by it, we'd certainly favor locking in those scenarios (not to mention making sure your lender has everything they need to get your loan done without the need for a lock extension, because those are getting much more expensive in some cases if they cause the time frame on the file to cross into the higher Guarantee Fee territory).

Long Term Guidance: We'd continue to advocate against trying to "get ahead" of current market movements due to the high degree of uncertainty.  The long-term direction of rates has been down, down, down, for the past year.  At some point, this will turn, and when it does, we highly recommend that you're prepared by drawing your OWN line in the sand as to how much rates would have to rise before you lock at a lost.  That's assuming you don't simply lock as soon as you're able.  For those with lower levels of risk tolerance who would consider movements in cost (despite unchanged interest rates) to be significant, or for those within 15 days of closing, or who are purchasing, this certainly favors locking.  We'd also consider that rates remain very close to all-time lows and uncertainty to all-time highs.  This also favors locking.

Loan Originator Perspectives

Mike Owens, Partner with HorizonFinancial, Inc.

As always I favor locking your rate. Too much can happen that will hurt rates and they can soar quickly at the hint of bond weakness. The new G-fee coming down the pike is also represented in longer duration lock periods. Some lenders will allow extensions to avoid the increased cost where others won't. Others have already built it into pricing and you can tell because they are way off. Pretty soon however, it will be unavoidable.

Today's BEST-EXECUTION Rates 

• 30YR FIXED -  3.5%
  
• FHA/VA - 3.5% (varies more between lenders than conventional 30yr Fixed)
• 15 YEAR FIXED -  2.875-3.00%
• 5 YEAR ARMS -  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations 

• Rates and costs continue to operate near all time best levels
• Rates could easily move higher or lower, but given the nearness to all time lows, there's generally more risk than reward regarding floating
• But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn't always mean they're done improving.
• (As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario.  There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).
  

MBS MID-DAY: On The Ropes Despite Lack Of Fundamental Motivation

MBS opened in slightly weaker territory but were still within yesterday's range.  That range was actually maintained for a good bit of the morning despite things generally drifting weaker.  Now, just after the 11:00am Fed Buyback, we've ratcheted below yesterday's lows and are trading around our weakest levels of the day.  10yr yields, in similar fashion, just popped over yesterday's highs and are now testing a break into 1.70's territory.  Frustratingly, there haven't been any standout motivators for the weakness in terms of headlines or data with whatever organic motivation there is, existing more behind the scenes in the form of position adjustments ahead of the auction cycle, the "on again" German court vote, and a veritable deluge of corporate bond pricings.

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

Pricing as of 11:09 AM EST

Morning Reprice Alerts and Updates

Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this morning.

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9:09AM  :  ALERT ISSUED: Bond Markets Open In Slightly Negative Territory

Treasuries were relatively flat and traded with exceedingly low volume during the Asian hours of the overnight session. But shortly into the European session, the German Constitutional court said that that it's ruling on the ESM would go ahead as planned tomorrow, despite news that a delay was considered yesterday. This provided the biggest pop higher in yields overnight and brought in volume at a healthy clip.

German Bunds were able to recover quickly after processing that headline but weren't able to make it back to yesterday morning's lows. Treasuries mimicked the movement and everything ratcheted to slightly weaker territory in the hour leading up tot he domestic open.

MBS opened several ticks lower and continue to move lower after the first hour, with Fannie 3.0s now down 7 ticks at 103-18. 10yr yields are up more than 3bps from 5pm levels, but essentially unchanged from the official 3pm close at 1.685. Stock futures moved higher after the German court news and have traded in a narrow, sideways range since then.

There's not other significant data scheduled for this morning and even the 1pm 3yr Treasury Auction isn't likely to be a major market mover. For now, we're trading technically, defensive of the 1.69 supportive ceiling in 10's and wary about the possibility of breaking higher.

8:43AM  :  ECON: Trade Gap Widens Less Than Expected; Record High With China

- July Trade Deficit $42 bln vs $44 bln consensus
- Exports -1.0 pct, imports down -0.8 pct
- Trade gap with China to record high $29.38 bln
- July Oil import prices lowest since March 2011

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total July exports of $183.3 billion and imports of $225.3 billion resulted in a goods and services deficit of $42.0 billion, up from $41.9 billion in June, revised. July exports were $1.9 billion less than June exports of $185.2 billion. July imports were $1.8 billion less than June imports of $227.1 billion.

In July, the goods deficit decreased $0.2 billion from June to $57.3 billion, and the services surplus decreased $0.3 billion from June to $15.3 billion. Exports of goods decreased $1.9 billion to $130.8 billion, and imports of goods decreased $2.1 billion to $188.1 billion. Exports of services were virtually unchanged at $52.5 billion, and imports of services increased $0.3 billion to $37.2 billion.

The goods and services deficit decreased $3.6 billion from July 2011 to July 2012. Exports were up $4.9 billion, or 2.8 percent, and imports were up $1.4 billion, or 0.6 percent.

Live Chat Featured Comments

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Brett Boyke  :  "they going to use all the same quotes from last year re: debt ceiling"

Matthew Graham  :  "RTRS- U.S. HOUSE SPEAKER BOEHNER SAYS "I'M NOT CONFIDENT AT ALL" OF AVOIDFING FISCAL CLIFF "

Ken Crute  :  "it won't be long before we think of 2012 as when it was easy to get a loan thru "

Steven Stone  :  "now someone should start a "payment protection" plan for new originations...pay a small upfront "insurance" or entrance fee and if the borrower gets in trouble, they make the payments for you"

Gus Floropoulos  :  "as a corr. lender, it will become even more painful selling paper"

Ira Selwin  :  "From the memo: "How is the Quality Control process changing for Freddie Mac and Fannie Mae with this announcement? ...Because loans will be targeted earlier in the review process, lenders will also likely experience an increase in the number of performing loans that are selected for review...Lastly, each loan file that is selected will be reviewed on a comprehensive basis""

Ira Selwin  :  "the memo says conducting quality control earlier in the process, and evaluation on a more comprehensive basis. Leads to greater evaluation by investors, leads to longer turntimes, etc..."

Gaius Rossini  :  "what do you mean ira? it might make things more difficult actually because of the upfront scrutiny?"

Ira Selwin  :  "one of the huge points in the announcement is QC part"

Gaius Rossini  :  "are originators going to reduce HARP overlays because of the 12-month relief?"

Gaius Rossini  :  "hey all - is the new fhfa announcement important?"

Matthew Graham  :  "RTRS - IF U.S. BUDGET TALKS DO NOT PRODUCE DOWNWARD TREND IN DEBT/GDP RATIO, RATING LIKELY TO BE LOWERED TO AA1 - MOODY'S "

Matthew Graham  :  "RTRS - 2013 BUDGET NEGOTIATIONS LIKELY TO DETERMINE U.S. AAA RATING AND OUTLOOK DIRECTION - MOODY'S "

Matthew Graham  :  "and in the "Here we go again..." category:"

Matthew Graham  :  "RTRS- GERMANY'S CONSTITUTIONAL COURT SAYS RULING ON EURO RESCUE FUND TO GO AHEAD AS PLANNED ON SEPT. 12 DESPITE NEW COMPLAINT"

Matthew Graham  :  "unrelated to your question CH, but relevant overnight news:"

Matthew Graham  :  "Sometimes it could be as simple as positioning into one of the almost daily Fed Twist buybacks"

Matthew Graham  :  "sometimes it's data, sometimes it's just Treasuries following Europe overnight and then doing their own thing to a greater extent in the domestic session."

Chip Harris  :  "So what is the deal with always opening up down now and then bouncing in the first couple of hours? just a coincidence on when Data is released?"

Matthew Graham  :  "RTRS- US JULY OIL IMPORT PRICE $93.83/BBL, LOWEST SINCE MARCH 2011, VS JUNE $100.13/BBL, -10.0 PCT FROM JULY'11 $104.27/BBL "

Matthew Graham  :  "RTRS- U.S.-CHINA JULY TRADE DEFICIT RECORD HIGH $29.38 BLN VS JUNE DEFICIT $27.40 BLN "

Matthew Graham  :  "RTRS- US JULY EXPORTS -1.0 PCT VS JUNE +1.2 PCT, IMPORTS -0.8 PCT VS JUNE -1.5 PCT "

Matthew Graham  :  "RTRS - US JULY TRADE DEFICIT $42.00 BLN (CONSENSUS $44 BLN) VS JUNE DEFICIT $41.90 BLN (PREV $42.92 BLN) "

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MBS RECAP: Choppy And Slightly Weaker Ahead Of Big Ticket Events

After hitting their best recent levels at the end of August, bond markets have simply been trending generally weaker in the first two weeks of September without much rhyme or reason.  Trading has been much more disconnected from data and headlines than the average "disconnected days," and we simply seem to have been drifting toward this upper end of a range of 10yr yields between 1.61 and 1.69.  We hit the upper boundary yesterday and actually tested a breakout today.  In terms of the yield movement, the breakout has unfortunately looked strong so far, but there's no question that volumes have simply been non-existent the first two days of this week.  It seems that everything will come down to the next two days with the German court vote and FOMC the following day.

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

Pricing as of 4:09 PM EST

Afternoon Reprice Alerts and Updates

Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.

---

1:07PM  :  ALERT ISSUED: Treasuries, MBS Pull Back From Earlier Weakness, Back In Line WIth AM Levels

The post-Fed Twist buying volatility has died down to a large extent though we'd be careful to note and observe the fact that 10yr yields themselves are exhibiting clear "pivot behavior" around a very important level just under 1.69. That's more of an ominous cloud however. For now, MBS are well off their earlier lows, back to 103-20 now in Fannie 3.0s after hitting 103-15 earlier.

That stabilization was good enough for a Provident reprice for the better, but we'd need to see better gains before expecting many other lenders to make similar moves. The line in the sand for "better gains" seems likely to rest with the 1.687 technical level in 10yr yields. If 10's cross into that territory and are moving lower, then it feels like MBS would have a better chance at gains of their own. That said, we'd continue to note the uncertain level of correlation on "roll day" and to that end can really only watch and react. So with respect to the bounce off the lows, it's "so far so good" for now, but continuing to hold stead inside the highs and lows from earlier this morning.

12:57PM  :  ECB's Asmussen Reinforces Importance Of Conditionality For Bond Buying

It may have been hard to hear over the sound of Draghi's Bazooka last week, but the theme of conditionality is building since then, and is set to get a major dose of clarity with tomorrow's German Court vote. We also had Spain's Rajoy out yesterday saying the Euro zone shouldn't set budget conditions for Spain in a tone that bordered on defiant (it was reminiscent of Greek leaders' austerity gripes). Here's a Reuters piece from ECB's Asmussen today that essentially reiterates the same stuff, continuing to set the stage for dueling ideologies in the conditionality debates ahead.

(Reuters) - The European Central Bank's new bond-buying programme is no substitute for government reforms and belt tightening, ECB policymaker Joerg Asmussen said on Tuesday, keeping the heat on Spain to reform its foundering economy.

Asmussen's comments, just five days after the ECB agreed its potentially unlimited bond-buy plan, show the German ECB board member wants to deter Madrid and Rome from slowing reforms at the prospect of the ECB intervening to lower their borrowing costs.

The ECB has made any buying under its new plan conditional on the country concerned tapping the euro zone rescue fund for aid, which would come with strict conditions - a design aimed at calming German fears about the ECB's strategy.

European policymakers are now posturing over the nature of these conditions. Another ECB board member, Frenchman Benoit Coeure, said on Saturday countries that apply for help will not necessarily be asked to make more cuts.

"The OMT is in no way a substitute for continued efforts in structural reforms and fiscal consolidation on the side of governments," Asmussen said of the ECB's new bond-buying purchases, to be known as Outright Monetary Transactions (OMTs).

"They are essential steps to regain trust and to ensure the sustainability of the euro area in the long run," Asmussen, a member of the ECB's Executive Board, added in a speech at Goethe University in Frankfurt.

11:12AM  :  ALERT ISSUED: MBS, Treasuries Weaker After Fed Buyback. Negative Reprice Risk Increasing

First of all, we'd note that lender reprice behavior around and on MBS "Roll" days can be inconsistent. Sometimes we'll see lenders forgo a negative reprice even when prices are down and other times we'll see inexplicable reprices when things aren't moving much. But we don't have the "things aren't moving much" problem at the moment.

Fannie 3.0s are down 10 ticks on the day now to 103-15 and 10yr yields just moved over 1.70 following the conclusion of the Fed buyback in the 25-30yr maturity range. The weakness takes MBS about 4 ticks lower than the lowest levels from rate sheet generation time and thus suggests some increased reprice risk.

Live Chat Featured Comments

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Ryan Kelly  :  "Our secondary market group has already for 45 & 60 day lock. 15 & 30 won't be affected till 9/25"

Matt Hodges  :  "many have already; WF will on Friday"

Jack Shotbolt  :  "Is everyone seeing their Investors bump their yield 50 bps or so to account for the upcoming GSE Fee increase?"

Matthew Graham  :  "I don't think there's much doubt that they'll rule in favor. The question is more about what sorts of conditions they'll lay out."

Jerry Turner  :  "so, if the German court rules in favor, what's the prognosis for US Treasuries (and MBS)? Seems it would move to risk-on in European markets and perhaps a sell-off in US bonds?"

Matthew Graham  :  "not bad JT. I don't know if that's the case or if anything can sway ze Germans from whatever course they may be set on, but your assessment is insightful and compelling."

Jerry Turner  :  "last minute sales pitch in the hopes of swaying the German court?"

Matthew Graham  :  "RTRS-WHEN ASKED WHETHER ECB WILL HOLD BONDS TO MATURITY ECB'S ASMUSSEN REFERS TO ECB STATUTES, SAYS ECB CAN BE ACTIVE BY BUYING AND SELLING BONDS AS PART OF MONETARY POLICY "

Matthew Graham  :  "RTRS - ECB'S ASMUSSEN SAYS IF THE CONDITIONALITY IS NOT GIVEN THE ECB CAN NOT BUY BONDS OF A COUNTRY "

Michael Tadros  :  "REPRICE: 1:57 PM - Interbank Better"

Matthew Graham  :  "RTRS - ECB'S ASMUSSEN SAYS WE SHOULD LIMIT OURSELVES TO ONE AND THREE YR MATURITIES WITH ECB BOND PURCHASES, NOT EXTEND BEYOND"

Rob Clark  :  "a- from ricky"

Matthew Graham  :  "No reaction in the long end. Any movement now is very likely not auction related."

Matthew Graham  :  "RTRS- U.S. 3-YEAR NOTES BID-TO-COVER RATIO 3.94, NON-COMP BIDS $30.28 MLN "

Matthew Graham  :  "RTRS - U.S. SELLS $32 BLN 3-YEAR NOTES AT HIGH YIELD 0.337 PCT, AWARDS 5.19 PCT OF BIDS AT HIGH "

Rob Clark  :  "3.94 btc"

Michael Tadros  :  "REPRICE: 12:52 PM - Provident Funding Better"

Matt Hodges  :  "WF hits on Friday"

S John Murray  :  "Not sure if this was already mentioned but we are starting to get the G Fee rate extension notices....as of today Chase Correspondent increased extension and relock fees by .625%...that is a steep hit... I am sure the rest will follow suit"

Matt Hodges  :  "yes, they have not changed it, though they did threaten"

Jason York  :  "FHA is still 6% correct?"

Matt Hodges  :  "don't ever forget the 2% rule, nearly got burned on that on investor"

Matt Hodges  :  "2% on n/o/o"

Jason York  :  "or 9% with 75% or less"

Jason York  :  "nevermind, found it, up to 6% on conventional for 75-90% ltv"

Matt Hodges  :  "depends on ltv, jy"

Jason York  :  "max closing costs for conventional is 3%, and FHA 6%, correct?"

Victor Burek  :  "clearly unconstitutional..but i bet they allow it"

Jason Wilborn  :  "30,000 individuals are protesting the constitutionality of the program - the biggest constiutional challenge in German history"

Jason Wilborn  :  "read an interesting article yesterday about the German Court Review of the ECB bond buying proposal"

Matthew Graham  :  "(for anyone who's lost, that's the German word for "conditions" as the important court vote due tomorrow is seen as essentially laying out the conditions under which troubled Euro states can receive Euro zone aid. This is a bit of an oversimplification, but there ya go)."

Matthew Graham  :  "yeah it looks very similar, and will be a perfect example of history repeating IF the reaction to FOMC is bond-market positive. Probably would need some extra strict bedingungen tomorrow as well. (woops, there I go again implying that Germany sets the conditions under which the rest of the Euro zone can access their emergency funds. Oh wait, "implying" might mean it was open for debate, so yeah, bedingungen!)"

Andrew Horowitz  :  "MG in regards to the 10 year a little bit of history repeating itself from march?"

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Revamped Repurchase Plan; Thoughts on Importance of QC; Agency Updates

Is it easier to finance 500 non-owner loans than it is 5? It is kind of looking that way.

But speaking of lots of loans, and lost in the chatter about the Treasury saying it will sell about $18 billion of its AIG stock holdings, reducing its ownership stake from 53% currently to about 20% after the sale and making a nice profit, some of the buzz in the rating agency session at yesterday's conference in Dallas focused on Redwood Trust's new non-agency deal. Here are is the summary. And Redwood share price, like many other mortgage related stocks (banks, REIT's, servicers, etc.) is doing pretty well.

And regarding loans in general, I received this note, "Rob, my borrowers ask me about bank lending. In this environment, can't banks make money even falling off a log?" My opinion is that no, they can't - it still takes work. Sure, the spread right now between their cost of funds (easily less than 1%) and where their loans are (an easy guess is where residential or commercial loans are right now) is good. But much of the cash they're earning now is being socked away for a rainy day. There are significant changes to bank capital structure under Basel III which may or will come into play - what if it is too expensive for banks to hold many residential mortgages being originated now? Regulatory changes have muddied the water so much, investors can't tell what sort of return they will get on their investment so capital flows have slowed to a trickle. Add to that a Presidential election year and an uncertain outlook and you have all the pieces of a very jumbled and confusing situation that has too much risk in motion to properly calculate bank income into the future.

It seems, however, that even though Fannie and Freddie are going after old repurchases with lots of vim and vigor, the FHFA is going to revamp repurchases. "Under the new rules, the two taxpayer-owned companies won't force lenders to repurchase defaulted loans if the borrowers have made 36 months of consecutive, on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government's Home Affordable Refinance Program."

Whoever controls the information, and can mine the data, is going to come out ahead, right? Just think of all the data that entities like MERS, title companies, the FHFA through Freddie & Fannie, and so on hold. There exists, outside of those entities just mentioned, "a computerized compendium of millions of housing transactions." It is a decade's worth of residential information from across the country, and some think it might shed some light on historical mortgage information that could be used to correct issues in the future. "The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx.... Triaxx's technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property's value." Here is the scoop.

It is definitely a different environment now then it was then for lenders. David Green, the president of quality control's The StoneHill Group, writes, "Rob, among lenders out there we are seeing confusion regarding Fannie and now Freddie's pre-funding QC requirements and recommendations.  The extent of the review, documenting and establishing action plans based on the results of the reviews and incorporation of the review into a company's Quality Control plan; all of these areas appear to be open to interpretation, based on who you speak with. We are also seeing many lenders still struggling with Fannie and now Freddie's Loan Quality Initiative (LQI); establishing a compliant QC plan based on the quality initiative, as well as  the scope of review based on the level of LQI.  Whereas LQI 1 encompasses all loan types, including FHA and VA, LQI 2 is generally based on conventional loan product. Many Lenders are still unclear of the levels of LQI as well as the initiative."

David continues, "Senior management's involvement and action around findings is required once the QC reviews are complete.  A formalized plan, involving Sr. Management, to review and remediate findings discovered during a Pre-Funding and/or Post Close Quality Control review is necessary for a successful Quality Control Program. Documentation around findings and resolutions as well as updating of the Lenders QC plan are an integral part of the process. Clients often ask about selecting a defect rate. While this is left up to the lender, selecting a defect rate that is relative to the lender's business model is imperative. Defect rates should be realistic in nature and should be established for both significant and insignificant ratings. Defect rates should not be set to a standard that is not reasonably obtainable. Lastly, a lenders commitment starts at the top and filters through to all employees of the company.  A "Commitment to Quality" statement outlining a lenders quality initiative, requirements and agreeance to adhere to this commitment should be executed by all employees.  This brings awareness and a level of understanding to all involved that the company is committed to Quality." (If you'd like to reach David, write to him at dgreen@stonehillgroup com.)

Well, the agency, investor, and lender updates just keep coming. It is hard to keep up, and I squeeze them in, space permitting. As always, it is best to read the actual bulletin, but these will show you the trends.

The National Association of Mortgage Brokers is presenting a webinar on the recent regulatory developments surrounding disparate impact claims and mortgage loan originator compensation on Thursday, September 13th.  Led by a team from BuckleySandler LLP, the training will also discuss the implications of the business model for wholesale lenders and brokers.  The event is free for NAMB members thanks to the sponsorship of SunTrust Mortgage, Franklin American Mortgage Company, and Premier Nationwide Lending.  See more.

Remember when you didn't need a logon and password every time you sent an e-mail? Those days might be coming to an end. "In an effort to provide more security to you and to your borrowers, Pinnacle Capital Mortgage now requires that all email containing sensitive and private information, (social security numbers, tax returns, credit reports, income documents, loan documents, loan disclosures, etc.) are sent to us with our secure encrypted email system. This is very important for your submission packages, to be encrypted, and any follow up documentation. It is very simple to use: log on to pcmloan.com, and click the link at the bottom of the page to get started.

Most know that the FHA has decreed that Social Security income, including Supplemental Security Income and Social Security Disability Income, may be used to qualify borrowers if it is considered likely to continue for at least three years after the date of the borrower's mortgage application.  This income should be verified with federal tax returns, the borrower's most recent bank statements disclosing deposit of the income, and a copy of the Social Security Benefit Statement (SSA Form 1099/1042S).  As proof of the income's continuance, lenders should provide a copy of the last Social Security award letter or any equivalent document that establishes award benefits to the borrower.  Full details of the documentation requirements are available via the official FHA-HUD Mortgagee Letter 12-15 (http://portal.hud.gov/huddoc/12-15ml.pdf).

Previously, the FHA had announced changes regarding unpaid taxes, condo owners and HOA fees unpaid utility bills, and manufactured housing titles as they pertain to title approval at conveyance.  These changes, which were set to go into effect on August 1st, will now go into effect on November 1st.

HUD-Approved Housing Counseling Agencies should be aware that the Notice of Funding Availability Policy Requirements for the 2013 fiscal year have been published and include instructions for applying for grant funds.  All applicants are required to have a Dun and Bradstreet Universal Numbering System (DUNS) number, one of which can be obtained here, as well as an active registration in the Central Contractor Registration system.  Applicant must also register to be eligible.

Rural Development has exhausted all funding for refinance transactions for this fiscal year, which draws to a close on September 30th.  This means that all Rural Housing refinance transactions for which an RD Conditional Commitment hasn't yet been issued will be suspended until funding for the 2013 fiscal year is available.  If a refinance loan has already been issued with a Conditional Commitment, it is still eligible to fund as per standard guidelines.  Rural Development has also issued a reminder of the guarantee and annual fee increases that go into effect on October 1, 2012.  All loans will be subject to the revised upfront guarantee fee of 2% and the revised annual fee of 0.4%.

Freddie Mac has amended its condo project reviewing guidelines and no longer requires copies of recorded declarations, by-laws, and amendments for established operations.  The guidelines for mixed-use condo projects have been relaxed as well.

In support of the Home Affordable Foreclosure Alternatives program, Freddie has updated Workout Prospector with an indicator that identifies HAFA deeds-in-lieu and short sales through the loan cycle.  The updates facilitate processing of file preparation, settlement, and reporting when delivering HAFA loan workouts.

As part of its Servicing Alignment Initiative, Fannie Mae's new short sale and deed-in-lieu of foreclosure guidelines have been released.  The updates cover preforclosure sales, borrower eligibility, imminent default, delinquency management, the streamlining of documentation requirements, borrowers' cash contributions, methods used to determine the property's market value, the evaluation of short sale offers, property list guidance, mortgage insurer approval, subordinate-lien payments, anti-fraud measures, servicer responsibilities, borrower relocation incentives, borrower response packages, evaluation notices, and the foreclosure review process.  Servicers must implement the changes by November 1, 2012, the full details of which may be found at www.efanniemae.com.

Starting on October 1st, Fannie will require servicers to cancel hazard insurance within 14 days of a foreclosure sale, assuming that the property has been inspected and confirmed vacant by the broker, agent, or property management company.

As it updates DU to Version 9.0, Fannie is making several policy changes that affect both DU-underwritten and manually underwritten loans.  LTV ratios, compensating factors for manually underwritten loans, Refi Plus appraisal report requirements, and Area Median Income limits, and the Eligibility Index on efanniemae.com are all being revised.  In addition, Fannie is updating the maximum amount of HOA assessments that may have a limited priority over Fannie Mae's mortgage lien document custodian requirements, and maximum allowable deductible for flood insurance.  Two new whole loan products for certain Refi Plus products will also be rolled out as part of HARP.

A supplement to the DU Version 9.0 Release Notes addressing additional changes is now available and may be viewed here.

There isn't a whole heckuva lot going on with the markets and rates. Yesterday treasuries and residential MBS prices ended the day mostly unchanged after erasing earlier losses. On the day the 10-yr ended at about 1.68%. But there certainly wasn't enough movement to have any rate changes.

There ain't much going on today, to be honest. We did have a trade deficit of $42 billion, a shade better than expected. We also have a $32 billion auction of 3-year notes, which will be followed by sales of 10-year debt tomorrow and 30-year securities Thursday. The market is anticipating the Federal Reserve, which meets on Wednesday and Thursday of this week, may announce it is willing to take out extra insurance against an economic relapse and increase asset purchases to spur growth. There is a good chunk of the market expecting the third round of bond purchases, commonly known as QE3. In the early going the 10-yr is 1.69% while MBS prices are down.

Given the day today (9/11), rather than spend the 15-20 seconds reading the daily attempt at humor, it would be a good time to remember what happened eleven years ago on September 11th. And the fact that the Treasury reports our national debt has now surpassed $16 trillion.

The Day Ahead: Good Dose Of European Data, First Major US Data, Auction Cycle Begins

The Day Ahead: Good Dose Of European Data, First Major US Data, Auction Cycle Begins

The week began fairly uneventfully yesterday as MBS essentially coasted sideways in a fairly narrow range, ultimately going out at similar levels to those seen Friday afternoon.  It was a similar story for Treasuries who may have coped with a bit more volatility on balance but made it back to positive territory just the same. 

Volumes were generally low though there was a healthier-than-usual increase in volume and price movement at 3pm following the release of a weaker-than expected Consumer Credit report.  That helped bond markets make their second "last stand" of the day at their weakest levels.  The first "last stand" came after the German constitutional court announced that they would, well, announce a decision as to whether or not the, um, decision on the ESM scheduled for Wednesday will be postponed due to recent gripes among German lawmakers.

Along with the FOMC festivities on Thursday, the German court ruling has been the other "biggie" of the week and if it doesn't end up happening (yet), the default implication is sort of Groundhog's Day of "six more weeks of economic uncertainty" as the Euro zone tries to flesh out who is getting whose money and under what bedingungen.  Sorry... did we just say bedingungen?  Innocent mistake...  Meant to say "under what CONDITIONS" but somehow we accidentally wrote "conditions" in German.  Also, the "six weeks" is simply a Groundhog's Day reference and nothing to do with how long it might actually take to come back to an ESM decision, though we'd hope it would be much faster than 6 weeks. 

The potential delayed voting news ends up making an appearance in today's news as it is the deadline given for the aforementioned decision on whether or not to postpone.  It's joined by the moderately relevant International Trade data in the morning of the domestic session, and before then by a reasonable offering of overnight data in Europe, including NFP in France, German wholesale inflation, and a speech later in the morning from prominent ECB board member Joerg Asmussen. 

The 3yr Auction hits in the afternoon, but considering that markets generally agree that the Fed is likely to extend the low interest rate verbiage in Thursday's announcement, 2 and 3yr auctions are likely to continue to have limited impact on MBS.  Keep in mind that it's "roll day" for MBS meaning light liquidity in the September coupons responsible for current price indications and an apparent "drop" in prices at the end of the day when we switch from viewing September's MBS prices to October's.

MBS Live Econ Calendar:
Week Of Mon, Aug 27 2012 - Fri, Aug 31 2012
Time	Event	Period	Unit	Forecast	Prior	Actual
Mon, Sep 10
15:00	Consumer credit	Jul	bl	9.05	6.46	--
Tue, Sep 11
08:30	International trade mm $	Jul	bl	-44.0	-42.9	--
13:00	3-Yr Note Auction	--	bl	32.0	--	--
Wed, Sep 12
07:00	MBA Purchase Index	w/e	--	--	178.4	--
07:00	Mortgage refinance index	w/e	--	--	4216.0	--
08:30	Export prices mm	Aug	%	0.1	0.5	--
08:30	Import prices mm	Aug	%	1.5	-0.6	--
10:00	Wholesale inventories mm	Jul	%	0.2	-0.2	--
10:00	Wholesale sales mm	Jul	%	0.9	-1.4	--
13:00	10-yr Note Auction	--	bl	21.0	--	--
Thu, Sep 13
08:30	Producer prices mm	Aug	%	1.3	0.3	--
08:30	Producer prices, core mm	Aug	%	0.2	0.4	--
08:30	Initial Jobless Claims	w/e	k	370	365	--
08:30	Continued jobless claims	w/e	ml	3.32	3.322	--
11:30	30-Yr Bond Auction	--	bl	13.0	--	--
12:30	FOMC rate decision	N/A	Â	--	Â	--
14:00	FOMC Member Forecasts	N/A	Â	--	--	--
14:15	Bernanke Press Conference	N/A	Â	--	--	--
Fri, Sep 14
08:30	Core CPI mm, sa	Aug	%	0.2	0.1	--
08:30	CPI mm	Aug	--	0.5	0.0	--
09:15	Capacity utilization mm	Aug	%	79.3	79.3	--
09:15	Industrial output mm	Aug	%	+0.1	0.6	--
09:55	U.Mich sentiment	Sep	--	74.0	74.3	--
10:00	Business inventories mm	Jul	%	0.3	0.1	--
* mm: monthly | yy: annual | qq: quarterly | "w/e" in "period" column indicates a weekly report * Q1: First Quarter | Adv: Advance Release | Pre: Preliminary Release | Fin: Final Release * (n)SA: (non) Seasonally Adjusted * PMI: "Purchasing Managers Index"