MBS Free Fall

FNMA 30yr 4.5 Coupon


The MBS 4.5 coupon is off nearly 160 basis points from yesterday's close, dropping 100 bps just since 1:30pm.

30yr fixed rates have jumped .25% - .375% on the price decline.

The Treasury market is suffering as well:
Bonds turn lower (CNNMoney.com, 5/27/09)

WSJ: "Fed Open to Buying More Securities"

As reported in the Wall Street Journal today, apparently there's talk among some members of the Fed's FOMC regarding the idea of purchasing more Treasury bonds and Mortgage Backed Securities (MBS). In other words, they want to see low rates for a longer period of time.

Some Federal Reserve officials are open to raising the amounts of mortgage and Treasury securities purchase programs beyond the $1.75 trillion that they have already committed to buying, according to minutes from the Fed’s April meeting.

“Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery,” according to the minutes of the April 28-29 meeting, released Wednesday with the usual lag. (Read the full minutes.)

The Fed can achieve low mortgage rates by increasing its purchases of MBS - when prices rise, yields (rates) fall. But it takes money, and lots of it. So the longer rates are artificially kept low, the larger the Fed's tab grows.

Thetruthaboutmortgage.com adds a perspective to the issue with it's most recent post about the Fed's slowing MBS purchases:

In a bid to keep interest rates on mortgages lower for a longer period of the time, the Fed has apparently decided to slow its purchase of mortgage bonds, according to a research note from Credit Suisse.

The analysts said they believe Fed involvement in the mortgage-backed securities market will be necessary well into 2010, and as a result, they’ll need to slow buying so it there’s enough purchasing power to remain engaged next year.

As the government reduces its purchases of MBS (and assuming investor demand stays the same), MBS prices will drop and mortgage rates will go up.

So are these two actions incompatible - slowing down purchases of MBS but increasing purchase funding? Not necessarily, because Fed could do both at the same time, all in an attempt to keep the low rate train rolling on.

Fed Continues MBS Buy

The Federal Reserve Bank of New York continues to make large buys of mortgage-backed-securities.  For the week ending Wednesday (March 25), the Feds purchased $47.3 billion from government-sponsored entities. 

To date, the Feds have taken on $341.55 billion in MBS.  

More at the Housing Wire

FED Announces $750 Billion More and Poof!... MBS Prices Surge, Rates Drop

'Rambo Fed' Will Buy Treasuries To Combat Crisis (Bloomberg, 03/19/2009)

"Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11."

And here's a snapshot of what happened in the Agency MBS market:

Fannie Mae 4.5 coupon


Rates improved by .125% to .25% yesterday afternoon.

Stock Market Drops, MBS Market Pops

Agency (Fannie Mae & Freddie Mac) mortgage backed securities improved today as the stock markets saw heavy losses on the first business day in March.


FNMA 30yr 4.5 coupon

Mortgage rates improved by approximately .125 to .25% from Friday's rate sheets, ending the day up 40 basis points. The MBS market was the beneficiary of the "flight to safety" while the Dow Jones Industrial Average dropped nearly 300 points to under 6,800.

MBS Tally 70 Billion So Far

Broker Universe reports that the Feds have so far purchased $70 billion in GSE (government sponsored enterprise) mortgage-backed securities.  It's part of what might be upwards of $500 billion spent in this way to help push down rates and, thus, help stabilize the housing market.  

The Fed purchases began in early January.  And they've had some success.  From the article:

"The Fed succeeded in narrowing the spread between the 10-year Treasury rate and mortgage rates, according to Mahesh Swaminathan, a Credit Suisse mortgage strategist. "The Fed's buying of mortgages is definitely a positive on the whole, but it doesn't guarantee lower mortgage rates if Treasury rates continue to sell off," he said."

FED: MBS Purchase Program To Begin In January

Release Date: December 30, 2008

For immediate release

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Further information regarding the structure and operation of the MBS purchase program is provided in the attached set of Frequently Asked Questions (FAQs).

Frequently asked questions

Effective December 30, 2008

General

What is the policy objective of the Federal Reserve’s program to purchase agency mortgage-backed securities?
The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Why is it necessary for the Federal Reserve to transact in the agency MBS market via external investment managers?
The operational and financial characteristics of MBS purchases are significantly more complicated than those associated with the assets that have traditionally been purchased by the Federal Reserve. The Federal Reserve has chosen external investment managers as a means of implementing the MBS program quickly and efficiently while at the same time minimizing operational and financial risks.

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian. The investment managers are BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP. The selection criteria were based on the institution’s operational capacity, size, overall experience in the MBS market and a competitive fee structure. The contract for a custodian is not yet final.

What securities are eligible for purchase under the program?
Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.

What is the investment strategy that will be employed?
Investment managers will employ a passive buy and hold investment strategy in accordance with investment guidelines prescribed by the Federal Reserve. Purchases will be guided by commonly referenced market indices. The agency MBS program will involve the outright purchase of up to $500 billion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the second quarter of 2009. The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.

The investment strategy may involve the use of dollar rolls as a supplemental tool to smooth market supply and demand. A dollar roll is a transaction involving the sale of agency MBS for delivery in the current month and the simultaneous agreement to repurchase substantially similar (although not the same) securities on a specified future date.

Does the agency MBS program expose the Federal Reserve to increased risk of losses?
Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When will the purchases begin?
Purchases are expected to begin in early January, 2009.

Who will the investment managers trade with and who is eligible to sell agency MBS to the Federal Reserve under the program?
Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers.

Will the agency MBS held by the Federal Reserve through this program be eligible for lending through the Treasury Securities Lending Facility (TSLF) or the daily System Open Market Account (SOMA) securities lending operations conducted by the New York Fed?
There are no plans for the agency MBS held by the SOMA to be available for borrowing through the TSLF or the daily securities lending program.

How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.

What is the legal basis for the agency MBS purchase program?
Purchases of agency MBS in the open market, under the direction of the FOMC, are permitted under section 14(b) of the Federal Reserve Act.

How is the Federal Reserve’s agency MBS purchase program related to the U.S. Treasury’s efforts to purchase agency MBS?
The Federal Reserve’s agency MBS program is separate and distinct from the U.S. Treasury’s program but both programs are aimed at fostering improved conditions in mortgage markets.

How will holdings under the agency MBS program be reported?
Balance sheet items related to the agency MBS purchase program will be reported after settlement occurs on the H.4.1. statistical release titled “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” There will be an explanatory cover note on the release when the new items appear for the first time. However, these data may be published well after trade execution due to agency MBS settlement conventions. In addition, the New York Fed will publish the SOMA agency MBS activity in more detail on its external website on a weekly basis.

What measures will the Federal Reserve take to ensure that an investment manager implementing the MBS program will not have an unfair advantage relative to other market participants due to the information it receives about the MBS program?
Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team that implements the Federal Reserve’s agency MBS program from other advisory and proprietary trading activities of the firm. The New York Fed will monitor each investment manager’s compliance with this requirement.

Where should questions regarding the MBS purchase program be directed?
Questions regarding the MBS program should be directed to the New York Fed’s Public Affairs department: 212-720-6130.

Find the press release here.

Yesterday's MBS Action

A chart of yesterday's pricing action in the FNMA 5.0 coupon, from the Mortgage News Daily's MBS blog


Wednesday's movement is from the middle of the chart on (1st half is Tuesday). Traders were on a shopping spree in the morning and rates improved to the best levels we've seen since 2003 (just under 5%). But within 15 minutes the buyers remorse kicked in and prices fell precipitously for the next 2 hours and continued to trade down for the remainder of the day. Our sub-5% rates had come and gone in a blink of an eye.

Some material to chew on:

Paulson Denies Rumored 4.5% Mortgage Rate Plan (Housing Wire, 12/17)

Jim Cramer seems to think we'll see 3.5% rates - Cramer's Stop Trading (Seeking Alpha, 12/16). Then he said on Mad Money (12/17) that "Benjamin Booyah Bernanke" will "take mortgage rates down to 4%, I'm telling you, that's where they're going to go." For those who follow or know of Cramer, a statement like this is no surprise. Jim likes to entertain, he often changes his tune, and he has quite a few critics.

And even with the FED buying MBS, not all lenders are able to meet the increased demand for loans - Mortgage Rates Left In Dust By Treasury Yields, Failed Lenders (Bloomberg 12/18)

MBS Reversal

MBS took a nosedive this afternoon. We're now back to yesterday's prices, and sinking. Rate worsening.

More to follow.

MBS Market Rallies on FOMC Announcement - Mortgage Rates Going Lower

MBS saw an afternoon rally yesterday, due to the FOMC's announcement to cut the Fed funds rate to a range of 0-.25% and their statement: "... the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant." MBS investors were overjoyed and are hopping on the (gravy) train.

MBS is also spiking higher (up 90bps so far) in early trading this morning and we should see rates improve by 1/4% or more this AM. When prices go up, rates go down.

FNMA 4.5 coupon


If you're on the fence with refinancing or purchasing, you may want to jump off.

MBS Market Rallies, Mortgage Rates Set To Improve

10:20am



I guess this is what happens when the Federal Reserve announces a plan to purchase $500b MBS from Fannie Mae and Freddie Mac. Here's today's Bloomberg article about the plan.

And here's the Treasury's announcement to purchase $200b in additional asset backed securities.

Looks like the Administration is directly targeting mortgage rates.

I expect rates to be ~.25% better this morning, and wouldn't be surprised to see the 30yr fixed in the low to mid 5% range this week.


FNMA 30yr 5.5 coupon
up 130bps at 10:15am

MBS WOW!

MBS Update 11/04/2008:

The FNMA 30yr opened up approx. -20bps from yesterday, and by 3:30pm we were up 109bps from the open. That's almost 110bps in a single day, and we're heading higher. This is the largest single day climb since the FNMA/FHLMC takeover in September. The 30yr fixed has improved ~1/4% since yesterday.



We have seen 2-3 rate improvements (depending on the lender) so far today and we might see one more by 5pm. The 30yr fixed was 6.5% last Thursday. Currently we are at 6.125%. What (or who) is moving today's market? Unsure at this point, but obviously buyers have entered the market in a big way.

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You can also contact us if you want up-to-date analysis on the MBS market and how it's affecting mortgage rates.

The rate rollercoaster

Lately, watching the action in the mortgage backed securities (MBS) markets has been like watching a car full of screaming teenagers hang on through the peaks and valleys of a world class roller coaster. In other words, it's been wild ride.

Just since September, we have seen the 30yr fixed mortgage rate fluctuate nearly 3/4 1 percent - between 5.625% and 6.375% 6.5% (stay up-to-date with our free daily rates email).

In normal markets, one can often get a general sense of the direction. Fundamentals can be followed and trends can be observed. But what we're witnessing in MBS is not the gradual inclines or declines of a functioning market. We're seeing wild swings in prices and reversals that occur in a matter of days.

Yesterday, Bloomberg reported on the difference in yields on MBS vs. US Treasuries. Fannie-Freddie Mortgage Bond Spreads Hit Widest Since March. The recent increased spreads have been driving MBS prices down and rates up.

"Agency mortgage-bond spreads have fluctuated since their record drops on Sept. 8 after the U.S. seized control of Fannie and Freddie. The spreads have widened on days when concern mounted that buyers relying on borrowed money including banks and hedge funds will have less demand for the debt -- including the past five trading sessions. Spreads have tightened when investors heeded a government pledge to support the market."

Predicting the direction of mortgage rates with accuracy in a stable market is a difficult task. But in current conditions it's nearly impossible.

So how does how does this translate for consumers? If you have a purchase contract on a home and plan on closing within the next 60 days, go ahead and lock your rate. Waiting for a particular rate that may or may not come is not worth the risk to your plans or your deposit. And the same goes for those who plan to refinance within the next 6 months - take advantage of the current historically low rates. Keep in mind that the average 30yr fixed rate since 1978 is 9.5% (Freddie Mac)

I'm not trying to "talk up my book" (giving advice or making an argument that bolsters one's position). Just pointing out what I see.

Visual evidence:

FNMA 30yr

MBS market swings back this afternoon

Looks like the Treasury may have already started implementing it's plan to double MBS purchases this month.

Around 3:30pm, someone (government?) came into the MBS market and went on a buying spree, BIG time. I can only assume that it's the Treasury or Fed, since this kind of move in prices in that short amount of time can only be achieved with serious purchase power. Of course, I could be wrong - it could be a very large institutional investor who's betting that prices will go up from here.

This morning we were down ~45bps (basis points). We are now up 112bps.

Banks have yet to issue rate changes, but we are, after all, late in the afternoon on a Friday (after an extremely volatile week). I expect we'll see better rates (1/8%) on Monday morning, if these prices hold.