MBS Live : MBS RECAP Open MBS Live Dashboard FNMA 3.5 103-23 : -0-04 FNMA 4.0 105-18 : -0-04 FNMA 4.5 106-23 : -0-04 FNMA 5.0 107-32 : -0-05 GNMA 3.5 105-05 : -0-02 GNMA 4.0 107-28 : -0-01 GNMA 4.5 109-04 : -0-03 GNMA 5.0 110-29 : -0-04 FHLMC 3.5 103-13 : -0-05 FHLMC 4.0 105-06 : -0-05 FHLMC 4.5 106-05 : -0-05 FHLMC 5.0 107-20 : -0-05 Pricing as of 4:03 PM EST Afternoon Market Updates A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard . 3:19PM : ECON: Consumer Credit Expands More Than Expected Novembers expansion of total Consumer Credit was revised to +$20.38 bln, very close to the original print. Today's report for December shows only a slight decrease in the pace to $19.31 bln. Economists had been expecting a bigger contraction to $7.7...(read more)
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A sub-committee of the House Financial Services committee today approved the FHA Emergency Solvency Act which is intended to shore up the finances of the Federal Housing Administration (FHA). The legislation strengthens FHA's Mortgage Insurance Fund by establishing minimum annual premiums for mortgage insurance; barring unscrupulous lenders from participating in the program, improving the FHA's internal financial controls, transparency, and disclosure requirements, and requires lenders who commit fraud to repay any losses suffered by FHA as a consequence. FHA's cash reserves have been hard-hit by the housing crash and have fallen below 2 percent Congress has mandated it must maintain. According to the subcommittee's press release, the agency's finances have deteriorated to the point where a...(read more)
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Although the recently confirmed 3.875% Best-Execution level remains intact for 30yr fixed, conventional loans, Mortgages Rates moved slightly higher today in terms of the costs required to obtain those rates. Weakness in Treasuries today was more pronounced than MBS, the "mortgage-backed-securities most directly responsible for determining mortgage rates. (learn more about how we calculate Best-Execution in THIS POST ). Initially driving today's market movements was news that political leaders would meet in Greece to vote on a soon-to-be-drafted bailout package. Greek officials have been reluctant to stand up in favor of creditor-imposed austerity. Even though they likely realize the dire implications of such reluctance, the political backlash from Greece's populace is pretty dire in it's own...(read more)
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MBS went through an interesting Employment Friday. I know it’s hard to remember back after a long weekend (especially for N.E. fans), but the bond market sold off pretty substantially on Friday after a better-than-expected employment report. The interesting aspect of the selloff was how it was focused on intermediate- and long-maturity Treasuries. While the yield on the 2-year barely budged, the 5-year yield rose 6 basis points on the day, and the yield on the 10-year was more than 10 bps over the previous day’s close.
This type of move impacts MBS investors, since they always want to see how MBS are performing versus some benchmark. One way to measure "relative performance" is to compare the price change for a security versus what it should have done, based on its duration relative to that of the benchmark. An easy way to calculate the projected price change for a security is to multiply the price change of the benchmark by a security’s “hedge ratio,” which is the duration of the subject security as a percentage of the benchmark’s duration. An easy example now is that 30-year Fannie 3.5s had, after Friday’s move, a duration of 4.0; using a duration for the 10-year of 8.9 results in a hedge ratio for Fannie 3.5s of around 45%. Therefore, if the 10-year note declined by a full point, Fannie 3.5s should have dropped by roughly 15/32s. (This is sometimes also referred to as “duration-neutral performance.”
There are a few challenges implicit in this discussion. One is that the relative performance (i.e., the price change of a security adjusted for hedge ratios) is going to vary if you have a significant shift in the yield curve, such as what we had on Friday. That’s why most MBS underperformed the 5-year Treasury while tracking the performance of the 10-year. (By my measure, Fannie 3.5s underperformed the 5-year by 5/32s while performing roughly in line with the 10-year.) Some people will attempt to measure performance using a different benchmark, such as the 7-year Treasury. However, the 7-year is not nearly as liquid as 5s or 10s, making it less useful as a “benchmark.” It’s also possible to measure performance versus a blend of the 5- and 10-year Treasuries, although this just splits the difference between the two Treasury securities.
The other qualifier is that there is no single “duration” for MBS, mainly because of prepayments. The subject of duration can be fairly complex; without getting highly technical, I think it will be helpful to briefly address the issue. Keep in mind that “duration” itself is simply the measure of the expected percentage change in price, given some standard change in the subject security’s yield.
The duration of a fixed-maturity bond is easy to calculate, since the cash flows are fixed. The durations quoted are “modified durations,” which are essentially calculated as the amount of time the present value of a cash flow is outstanding. (The basic calculation is call “Macauley duration, and it’s quite similar in concept to “weighted average life,” or the amount of time a bond’s principal is outstanding.) With a few adjustments or “modifications,” the modified duration gives the price sensitivity of a bond for small moves in interest rates.
However, MBS durations can be calculated in a variety of ways. The duration of 4.0 for Fannie 3.5s quoted above is based on the calculations of an OAS model (YieldBook , in this case, which is owned and marketed by Citigroup). The durations from an OAS model are, fittingly enough, call “OAS durations.” OAS durations (or OADs) are complex to calculate, but relatively simple in concept. The models calculate prices for a move up and down in interest rates, and the prices in the two scenarios are then used to calculate the duration.
There is also a simpler measure in MBS called “cash flow durations,” which are simply the modified durations for securities using some prepayment assumption. (The cash flow is generated using a prepayment assumption; the modified duration is then calculated for the cash flows.) Cash flow durations are often used by investors, particularly for MBS pools and fairly straightforward securities. A separate category of durations are calculated using historical price changes for the subject security relative to yield changes for a benchmark. An analysis could “regress” the daily percentage price change of Fannie 3.5s versus the daily yield change of the 10-year Treasury. The slope of this regression line is the “empirical duration.” I don’t like to use empirical durations (“empiricals”) directly as a hedging tool, since they’re backward-looking. (I think of them like trying to drive down the highway using your rear-view mirror; as long as the road doesn’t curve, you’ll be okay. But it always does, eventually.)
However, empirical durations are useful in describing MBS performance. For example, if the empirical duration for an MBS is longer than its OAD, the security is said to be “trading long.” This is a good thing for bondholders if bond prices are rising, but hurts performance when bond prices are soft and Treasury rates are rising. It’s best to think of all forms of duration as tools that allow you to calculate expected performance and measure portfolio risk.
Bond markets had already been trending into negative territory leading up to today's 3yr auction, but took a turn for the worse afterwards with some help from a few newswires out of Greece. All that is detailed in the following alert from MBS Live. 3 Year Auction Moves The Whole Stack. Greece Piles On. Negative Reprices - 1:34PM 10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5's. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no... In and of themselves, 2 and 3yr auctions aren't enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week's NFP, and the fact that any bounce back versus that weakness was largely due to ongoing...(read more)
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Details are still sketchy, but apparently a settlement has been agreed upon between five major banks and a majority of the states' attorneys general. The settlement involves Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, and Ally Financial and arises out of charges that the banks and their subsidiary servicers used robo-signing and other abuses in processing thousands of foreclosures. The settlement was announced by lead negotiator, Iowa Attorney General Tom Miller who, according to CNBC said of the deal, "This enables us to move forward into the very final stages of remaining work. Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement," Miller said in a statement released late Monday...(read more)
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MBS Live : MBS MID-DAY Open MBS Live Dashboard FNMA 3.5 103-17 : -0-10 FNMA 4.0 105-15 : -0-07 FNMA 4.5 106-23 : -0-05 FNMA 5.0 108-00 : -0-04 GNMA 3.5 104-32 : -0-08 GNMA 4.0 107-21 : -0-08 GNMA 4.5 109-02 : -0-05 GNMA 5.0 110-27 : -0-05 FHLMC 3.5 103-08 : -0-10 FHLMC 4.0 105-03 : -0-07 FHLMC 4.5 106-07 : -0-04 FHLMC 5.0 107-19 : -0-06 Pricing as of 11:01 AM EST Morning Market Updates A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard . 10:31AM : ALERT: Negative Reprice Risk Increasing as MBS Hit Lows 10yr benchmarks are on the verge of a fairly meaningful technical breakout, at least as far as the yields themselves are concerned. Volume, on the other hand, while much higher than yesterday is not high enough to do justice to the very important...(read more)
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This is Black (African-American) History Month. The event began as Black History Week in 1926. For many years, the second week of February was set aside for this celebration to coincide with the birthdays of abolitionist/editor Frederick Douglass and Abraham Lincoln but then expanded in 1976 into Black History Month. The 2010 census counted 42 million black (either a single ethnicity or a combination of races) people in the U.S., nearly 14% of the population. Looking at the states, New York had the highest population with 3.3 million blacks, followed by Florida, Texas, Georgia, California, North Carolina, Illinois, Maryland, Virginia and Ohio. In terms of percentages of overall state population, Mississippi led the nation with 38%, followed by Louisiana (33), Georgia (32), Maryland (31), South...(read more)
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There are all sorts of ways to divide market moving information into different categories. One of our favorites is also one of the most broad: scheduled vs unscheduled. At first glance, it might seem a bit odd to classify something scheduled as "market moving information" before it has been released. After all, we don't yet know what it's specific impact will be, or if it will even have one. But the important part here is not so much about the market impact and more about the fact that IF the data in question proves to be a market mover, AT LEAST WE KNOW what time of day it is released. The same courtesy is rarely extended to markets by the more significant market movers that concern European woes. The timely example would be Greece's current petulant defiance of it's three most important bond...(read more)
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The Departments of Housing and Urban Development (HUD) and Treasury issued the administration's January Housing Scorecard on Monday. The report is essentially a summary of data on housing and housing finance released by public and private sources over the previous month and/or quarter. Most of the data such as new and existing home sales, permits and starts, mortgage originations, and various house price evaluations have been previously covered by MND. The scorecard incorporates by reference the monthly report of the Making Home Affordable Program (MHA) through the end of December. This includes information on the universe of MHA programs including the Home Affordable Modification Program (HAMP), HOPE Now, and Second Lien Modifications and other initiatives. Since the HAMP program began in...(read more)
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The Mortgage Bankers Association (MBA) reports that commercial and multifamily loan originations were down 7 percent in the fourth quarter of 2011 compared to the third quarter but were 13 percent higher than originations in the fourth quarter a year earlier. The year-over year change was driven by originations for both industrial and multifamily properties which increased 43 percent and 31 percent respectively from Q4 2010. On the negative side, retail loans were down 8 percent, loans for healthcare properties fell 24 percent, office properties were down 29 percent and hotel originations decreased 44 percent. Quarter over quarter results were mixed. There was a 153 percent jump in originations for health care properties; industrial loans were up 51 percent and multifamily properties increased...(read more)
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MBS Live : MBS RECAP Open MBS Live Dashboard FNMA 3.5 103-28 : +0-05 FNMA 4.0 105-23 : +0-07 FNMA 4.5 106-27 : +0-02 FNMA 5.0 108-02 : +0-04 GNMA 3.5 105-08 : +0-05 GNMA 4.0 107-29 : +0-05 GNMA 4.5 109-07 : +0-03 GNMA 5.0 110-30 : +0-02 FHLMC 3.5 103-19 : +0-04 FHLMC 4.0 105-11 : +0-06 FHLMC 4.5 106-09 : +0-01 FHLMC 5.0 107-20 : +0-03 Pricing as of 4:03 PM EST Afternoon Market Updates A recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard . 2:36PM : ALERT: MBS Gains Hold. Additional Positive Reprices Reported About 2 hours ago, we started to entertain the possibility of positive reprices despite the lack of outright gains, and suggested that additional lenders would either need more time or further improvement in prices. They ended up getting both...(read more)
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Following Friday's employment data, Mortgages Rates moved quickly higher. In most cases, the changes were seen not in the quoted interest rates themselves, but rather in the closing costs required to obtain those rates. A small number of lenders' Best-Execution rates rose to 4.0%, but a majority stayed at 3.875%. (learn more about how we calculate Best-Execution in THIS POST ). For a given interest rate, there are a range of costs at which it could still be a best-execution candidate. Whereas Friday basically took these costs from the low side (about as low as they'd even been) to the high side, today's improvements serve to moderate that movement back toward somewhat of a middle ground. In another way of looking at things, you could think of the past three days as 3.875% best-ex rates being...(read more)
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The list of Improving Housing Markets (IHM) maintained by the National Association of Home Builders (NAHB) took another big jump in February, rising from 76 in January and more than doubling the 41 reported in December. There are now 98 metropolitan areas representing 36 states included on the list. The IHM identifies metropolitan areas that have shown improvement from their respective troughs on each of three metrics - employment, housing permits, and home prices - for at least six consecutive months. NAHB uses data from the Bureau of Labor Statistics, the U.S. Census Bureau, and Freddie Mac to measure improved performance. The additions to the February Index include some metropolitan areas that had been particularly weak including Miami, Detroit, Memphis, Kansas City, Missouri; Portland,...(read more)
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( MBS Live ) - Against today's data-free backdrop, the only real market mover has been the earlier scheduled Fed buying (30yr sector of Treasuries) that left the long end of the yield curve in slightly better shape. 2s v 10s moved down to 167 from 170.8 just before the Fed buying. In the process, 10yr yields have held support nicely under 1.95, and it seems that MBS appreciate the stable environment. Fannie 3.5's have marched calmly to better and better prices all morning, now up 4 ticks at 103-27. Volume has been quite light and volatility quite low for MBS. The swings in Treasuries have been a bit choppier by comparison, but this is the expectation surrounding these Fed market ops, and as long as the next pivot point on either side of the prevailing range remains unbroken, the volatility...(read more)
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