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A primer on MBS issuance; How 'bout these rates!

Friday, March 14, 2014 - Article by: bcahoone - Global Home Finance Inc - Message

Who doesn't love a good 'Top 10' list? If it wasn't for top ten lists, and videos of cats dancing, the internet would be reserved for its intended purpose: governmental communication after a global thermo nuclear war....and who wants that? But it is interesting to see the list of housing markets exploding around the U.S. The data is provided by Core Logic (the only reason I've included the link), by way of WallStCheatSt. In percentage order for the last 12 months: 10. Hawaii (11.1), 9. Idaho (11.1), 8. Washington (11.6), 7. Florida (12.5), 6. Arizona (13.1), 5. Georgia (13.4), 4. Michigan (13.7), 3. Oregon (14.3), 2. California (20.3), 1. Nevada (22.2).

We want them on that wall; we need them on that wall.....Marines? Maybe, however, I'm referring to Wells Fargo's economics group. In the latest installment of Housing Data Wrap-Up: How Long Will It Take Housing to Shake off the Chills? The group breaks down season challenges in the housing market. While California and much of the southwest has been talked to death about the impending water drought and unseasonably warm weather, much of the nation has been mired down in abnormally cold storms for much of the winter. Has this affected the housing market? Maybe, but seasonality has always been an issue. Wells Fargo writes, "Weather-related weakness will be relatively easy to overcome. November, December, January and February are typically some of the least important months of the year for home sales and new home construction. While these four months account for one-third of the year, data for the past 25 years show the four late fall/winter months accounting for just over one-quarter of new single family home sales and just under 30 percent of single-family starts. By contrast, the following three months account for nearly 37 percent of new single-family sales and nearly 38 percent of starts." Much will be determined in the housing markets in the next six months. While a lot of effort was expended in Q4 mitigating exposure to QM, one has to believe as we enter into the traditional purchase market season, that an equal amount of time and resources will be devoted to the lackluster step-child: the purchase market.

Mortgage traders report seeing about $1 billion a day from originators - but that is misleading. Looking at the housing market, remember the large percentage of all cash buyers - it is huge! But some of the daily trading numbers leave off the product sold directly to the agencies through their cash windows - although that is also down for the month. This week BAML reported on fixed MBS issuance. "Total: $29 billion MTD vs. $61 billion in Feb; Fannie: $12bn MTD vs. $25bn in Feb; Freddie: $9bn MTD vs. $17bn in Feb; Ginnie: $8bn MTD vs. $19bn in Feb." Another investment bank reported that it expects the monthly gross issuance of agency MBS to reach roughly $90 billion by May/June of this year (up from its average of $67 billion in January and February). The bank also expects the monthly net issuance of agency MBS to reach $20 billion over the same time frame (up from $10-$11 billion in January and February).

Let's put some more perspective on this. During the past two months (Jan-Feb), the gross issuance of agency MBS had averaged only $67 billion per month, while it averaged about $150 billion during the first half of 2013. The sharply lower gross issuance due to lower originator selling has been one of the major technical factors supporting the tight valuations of agency MBS basis over the past several weeks. Think back to high school econ, and supply and demand: if supply drops, and demand is steady, the price will increase. In this case, MBS prices have improved relative to Treasury securities. And in spite of the Fed's tapering off of MBS purchases, supply has been down, so percentage-wise the Fed is still buying a dominant percentage.

If the monthly gross issuance of agency MBS is going to increase by that much to $90 billion a month by the summer, where is it going to come from? Approximately 52% of the total agency MBS issuance, or about $34 billion per month, has been coming from purchase transactions recently and the seasonality in purchase activity is going to have a substantial impact on both the gross and net issuances of agency MBS. Over the past two years (2012-2013), the average existing home sales number from May-July was about 50-58% higher than that of the prior December-February time period. A similar seasonality may be noticed in the monthly agency MBS issuance.

Second, mortgage refi activity contributed about $30 billion agency MBS issuance per month in January and February. Rates have dropped slightly, but this decline in mortgage rate hasn't led to any pick-up in the MBA refinance index nor do experts think we'll see another huge increase in refis. It really takes a good salesperson to talk someone out of a 3.50% rate into a 3.75% rate. But we'll still see refi biz pick up a little bit - there are always some borrowers out there refinancing for some reason.

Turning to legal matters, anytime the press can combine the names Countrywide, Fannie Mae, Freddie Mac, Bank of America, and lawsuit into one story, you can bet they will.

What the heck? All the smartest guys in the room told us that rates in 2014 were moving higher. We began the year with the 10-yr.'s yield sitting at 3.00% - easy enough to remember - and now we're at...2.62%?! Nothing moves in straight direction, of course. But the reason for the expectations of higher rates was that the U.S. economy would continue to do better, housing would appreciate, and job formation would increase, thus leading to more demand for credit and the Fed lessening their asset purchases.

Of course, we didn't predict the heightened tensions between Ukraine and Russia causing the proverbial "flight to quality" into U.S. fixed-income securities, pushing their prices higher and rates lower. Thursday the market decided to focus on Russian military exercises near the Ukraine border, and warnings by Europe and the U.S. that it would place sanctions on Russia starting Monday if Crimea goes ahead with a vote on Sunday on a referendum to become part of Russia.

Are we heading for another refi boom? That would be a real stretch at this point. But everyone is reporting a pickup in locks and in activity. Some of that is weather related, but some of it is due to seeing such dismal January and Februarys that an upswing was practically inevitable. But hey, we'll take it! Thursday the 10-yr improved by .625 and closed at a yield of 2.65%, and agency MBS prices (that drive rate sheets) improved .5-.625.

And we're not done with the fun. This morning we had the Producer Price Index - PPI - for February. Inflation hasn't been a problem in many years, but the index, set in 1982 at 100, is now up around 200. It was forecast at +.2% with the core rate (which doesn't include volatile food and energy costs) at +.1%. The numbers actually dropped by .1% and .2%, respectively. We will have the preliminary March Consumer Sentiment around 10AM EST. t 9:55 a.m. The 10-yr is down to 2.62% after the anti-inflation news, and agency MBS prices are better by about .125.

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