Morning Report: TBA market in chaos

Vital Statistics:

	Last	Change
S&P futures	2411	22.4
Oil (WTI)	24.61	2.39
10 year government bond yield		1.01%
30 year fixed rate mortgage		3.84%

Stocks are higher this morning on overseas strength. Bonds are up, while MBS are down.

The MBS market has decoupled from the Treasury market, with weakness across the coupons. It got so bad yesterday that bid/ask spreads widened to about a point and some coupons in the Ginnie space simply stopped trading. Despite a rally in 1.5 point rally in the 10 year, 2.5% TBAs are down half a point. The Fed has taken notice and has directed even more QE money to the sector. They are expected to buy about $35 billion of MBSs today.

The issues in the TBA market are probably due to a few things: First mortgage backed security investors are probably deleveraging. The massive sell-off we saw in the mREIT sector on Wednesday (with some stocks down 50%+) was due to rumors that banks were pulling their repo lines. Also, with the trade deficit (probably) falling with China we are seeing less Chinese purchasing of mortgage backed securities. This is affecting pricing as well.

Fannie Mae’s window pricing took a turn for the worse yesterday as well. Perhaps they are simply full, but take a look at the chart below. We are back to mid-January levels. In other words, all the improvement from the emergency rate cuts are gone. Chart courtesy of Optimal Blue.

Warehouse banks are beginning to demand huge haircuts on jumbo loans and are rejecting non-QM loans. So forget about those for a while.

European banks are struggling right now, and the fear is that it will spread to the US banks. Deutsche Bank has always been a problem child, and I don’t even want to get started on what the markets think of Italian banks Unicredito and Intesa SanPaolo Imi. This is going to affect US banks and reduce a lot of the risk tolerance in the system.

Home buyers need to bake in more time to close. Meanwhile the industry waits for guidance regarding verbal verifications of employment, and hopes that drive-by appraisals will become acceptable.