Morning Report: A view of things from the perspective of an investor

Vital Statistics:

 

Last Change
S&P futures 2427 22.4
Oil (WTI) 28.81 0.09
10 year government bond yield 0.8%
30 year fixed rate mortgage 3.48%

 

Stocks are up slightly after yesterday’s bloodbath. Bonds and MBS are down.

 

The actions taken by the Fed over the weekend seemed to help things in the mortgage market. According to Optimal Blue, the average 30 year fixed rate mortgage fell 23 basis points yesterday. Some of this was due to interest rate movements, but the biggest reason was a narrowing of MBS spreads.

 

Let me throw a little inside baseball stuff to explain what is going on. Mortgage backed securities are the basic input into rate sheets. They have an imputed yield and as of Friday, the difference between the imputed yield on the mortgage backed security and the corresponding Treasury was pushing 150 basis points. A month ago, it was around 100 basis points. The widening of MBS spreads (which translate into higher mortgage rates) was driven by a number of things, including prepayment fears, high refinance volumes, mortgage backed investors (think mortgage REITs) deleveraging, and a fear that repo rates will rise. The Fed’s actions over the weekend did two big things. The Fed’s commitment to provide liquidity to the markets soothed a lot of fears over repo lines getting pulled. The restarting of quantitative easing meant that one of the biggest players in the MBS market was back and went from being a net seller to a net buyer. That was just what the MBS market needed.

 

Annaly Capital (one of the biggest investors in mortgages) held a conference call yesterday to explain what is going on in the MBS market. Mortgage bankers should understand how the people on the “other side of the trade” – i.e. MBS buyers think. Here are my notes from the call yesterday

  • Fed much more accomodating with liquidity than it was in 2008.
  • MBS are the most attractive since before the financial crisis
  • Not seeing banks pull repo lines
  • Private label securitization markets will take a hiatus for a while
  • Repo haircuts remain unchanged.

The punch line is that the Fed is 110% committed to preventing a replay of 2008, where liquidity dried up and affected business. They do not want to see warehouse lines being pulled, repo lines being pulled, etc. Note the Fed committed to adding $500 billion in overnight repo financing as well.

 

Annaly investors were concerned that the upcoming year will be the biggest refinancing wave since 2003. For those that weren’t in the business then, 2003 origination volume was around $3.7 trillion. That is 75% higher than last year. The industry is about to be inundated with files, once the Coronavirus issue passes.

 

If the private label securitization markets go on hiatus, don’t be surprised to see the non-QM business slow down, and maybe mediocre pricing in the jumbo market. Simply put, the banks are being encouraged to keep businesses afloat and not just fill their balance sheet with portfolio products. Stock buybacks are also going to be suspended until this is over.

 

No, you can’t get that 0% mortgage rate you heard about on TV.

 

 

 

 

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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