2013.11.15 - IFR Weekly

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Thomson Reuters 2008 The contents of this report, either in whole or in part, may not be reproduced, copied, or distributed without prior written permission of

the publishers. Action will be taken against companies who ignore this warning.

Key Points:

48-hour day for Class C is Tuesday, Nov. 19 and Friday, Nov. 22 for Class D.

Economic Releases:

Monday: NAHB HMI (Nov)

Tuesday: ECI (Q3)

Wednesday: MBA Mortgage Application Indexes, CPI (Oct), Retail Sales (Oct), Business Inventories (Sep), Existing Home

Sales (Oct)

Thursday: PPI (Oct), Philly Fed (Nov), Initial Claims, FHLMC PMMS

Other Items of Interest:

Monday: FRB New York President Dudley (12:15), FRB Philadelphia President Plosser (13:30), FRB Minneapolis

President Kocherlakota (19:45)

Tuesday: FRB Chicago President Evans (14:15), Chairman Bernanke (19:00)

Wednesday: FRB NY President Dudley (10:00), FRB St. Louis President Bullard (12:10), FOMC Minutes (14:00)

Thursday: FRB Governor Powell (9:45), Treasury announces 2-, 5- and 7-year notes (11:00), FRB Richmond President

Lacker (12:30), 10yr TIPS auction (13:00), FRB St. Louis

President Bullard (13:00), Fed MBS purchases report (14:00)

Friday: FRB Kansas City President George (8:40), FRB Governor Tarullo (12:15)

Don't forget to visit www.ifrmarkets.com for real time analysis and commentary during the trading day.

The Week Ahead

The pattern may have been set and the dye already cast after the correction and consolidation post-payrolls, as we appear

to be on semi-auto pilot with respect to any moves heading into the Thanksgiving holidays. Unless the next payrolls report

prints as robustly as the last release, then the market will drift a bit until risk events present themselves. FOMC minutes

this week may have a moderate impact on future QE3 timetables; however, the market seems to have found its interim

level.

Certainly thinned supply has tilted the bias toward tightening unless and until any unforeseen risk events occur. Lower

shorter-term funding rates for a longer period of time seem to be the template, and that will inspire and elicit more MBS

carry trades as rolls remain elevated. The lower stack wont decompress or compress much more this week as lower FN3.5/3 swaps remain just above four points, while rate-sheet sensitive FN4/3.5s remain 1/4 point above three points.

For 15yrs, their fast run-up post-NFP seems to have backtracked slightly with current levels seen as support; although as

curve predicated as they are, we dont portend a flattening of the yield curve. No real moves are expected away from two points and 7/8 of one point on the Current Swap (DW3/FN3.5) and Bottom Swap (DW3.5/FN4). The same goes for

GNMAs and GNMA IIs versus longer FNMAs which seem comfortably mired in a short-term range with corrections and

adjustments priced in.

Friday November 15, 2013

Mortgage Backed Securities Weekly 18 November

Albert Durso, Senior Market Analyst - MBS Sally A. Runyan, CFA, Senior Market Analyst - MBS M Professional Media-USA-TTD [email protected] [email protected]

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For the 30yr FNMA Current Coupon basis, the familiar range corridor is set: +60/10yr notes and +65/10yrs as supply is

seemingly no match for demand, given a lessened event risk backdrop.

The Week That Was

The holiday-shortened week began with

taper trepidation following the better than

expected employment report and ended

more confident again that the FOMC

would likely not begin until March 2014.

The improved confidence stemmed from

Janet Yellen's testimony on Thursday

before the Senate Banking Committee in

regards to her nomination for Fed

Chairman, which markets interpreted as

dovish in regards to monetary policy.

In her prepared remarks, she noted that the

current unemployment rate of 7.3 percent

while down from a peak of 10 percent "is

still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has

been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time." She went

on to say the Fed's use of its monetary policy tools was "to promote a more robust recovery", adding "I believe that

supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

During the Q&A portion of her testimony, her responses related to QE were that (1) it has made a meaningful contribution

to the recovery; (2) there was no set time for when they would decide to slow their pace of buying and that it was a

meeting by meeting assessment of conditions; and (3) at this time she believed the benefits have exceeded the costs.

Markets rallied on her testimony with the 10-year note yield declining to 2.725 percent on Thursday after rising to 2.768

percent on Tuesday on further fallout from nonfarm payrolls.

Meanwhile, economic news was mixed at best which did not aid investors in any fine tuning of taper odds; however, next

week has a fuller calendar of data including Retail Sales, Philly Fed, inflation, Existing Home Sales and NAHB.

In Structured Products Research from Wells Fargo, analysts noted that if the data leading up to the jobs report at least

does not disappoint while NFP is another positive report, markets are likely to price in a "sooner" taper and push rates

significantly higher. Markets also may be especially sensitive based on what is revealed in the minutes from the FOMC's

October meeting which is released on Wednesday afternoon.

While MBS investors are attuned to the taper potential, they remained cognizant as well of the strong technicals currently

in the sector because of the Fed's presence. This kept the 30-year current coupon spread tightly range bound at between

+66.2 and +62/10yr note over Tuesday through Friday, and investors opportunistic to weakness and strength across the

coupon stack (see graph above).

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Until there is more key data or other information to gauge taper timing, the supply/Fed-demand dynamic should keep

spreads in a tight range with investors trading on intraday richening or cheapening.

While lower coupons especially benefited on Yellen, even before that flows were moving down in coupon following

recent gains brought on by (1) the employment related sell-off that led flows up in coupon; (2) the rate sensitivity and

burnout that is showing in higher coupon prepayments, and (3) the blocked nomination of Rep. Mel Watt for FHFA

Director.

With flows essentially two-way among private investors, the Fed was left to absorb the mediocre supply from originators

that averaged just $1.3 billion per day while its appetite on net equated to $2.8 billion per day based on its latest weekly

purchases report. Buying was focused on 30-year 4s and 3.5s which is where the majority of supply is at.

Selling from mortgage bankers is expected to remain limited at current mortgage rate levels as only a modest percent of

organic borrowers have an attractive enough incentive. The latest reports from the Mortgage Bankers Association and

Freddie Mac indicated effective 30-year fixed conforming rates at about 4.50 percent, while refinancing activity declined

further according to the MBA. In order to really stimulate refinancing activity and thus supply, mortgage rates have to

decline well through 4.0 percent.

In other mortgage-related activity, 15s lagged 30s as the latter benefited the most on the dovish Fed outlook, while

GN/FNs held firm on favorable technicals. Trading in specified pools was mixed with bid lists from originators, as well

as, real and fast money particularly weighing on the sector (and payups) early in the week.

For the week, volume was near average at 92 percent of the 30-day moving average versus 113 percent previously; the 30-

year current coupon spread was over 4 basis points tighter to +62/10yr note, while 3m10yr vol was down about 8 basis

points. Meanwhile, excess return to Treasuries on Barclays MBS Index for the week through Thursday was +15 basis

points.

Headlines from Week of November 11

Regulatory/Legislative

The Senate Banking Committee could vote on Janet Yellen's nomination for Fed Chairman as soon as the week of Nov. 18. (http://www.reuters.com/article/2013/11/14/us-usa-fed-yellen-committee-idUSBRE9AD17F20131114).

The NYFRB reported gross agency MBS purchases of $14 billion and net purchases of $11.2 billion in the holiday-shortened week ending November 13. Net buying averaged out to $2.8 billion per day which compared favorably to

mortgage banker selling that averaged $1.3 billion per day. Other items of interest are highlighted below.

o The Fed engaged in dollar rolls totaling $2.8 billion; 78.6 percent were in 30-year 4.5s (13.6% FH, 86.4% FN) and 21.4 percent in Dwarf 3.5s.

o Buying in 30-year 4s increased to 42.0 percent of total purchases from 30.1 percent as the Fed followed supply; 3.5s declined to 48.2 percent from 59.9.

o GNMA purchases declined to 17.9 percent from its more normal average of 20 percent, while 15s held just below 10 percent at 9.8 percent.

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Fed MBS Purchases

FHLMC FNMA GNMA Total Cumulative Total

Coupon Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

30yr 2,700 88.5% 5,400 87.8% 2,000 100.0% 10,100 90.2% 1,067,850 84.3%

2.5% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 9,900 0.8%

3.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 481,300 38.0%

3.5% 1,450 53.7% 2,350 43.5% 1,600 80.0% 5,400 53.5% 377,750 29.8%

4.0% 1,250 46.3% 3,050 56.5% 400 20.0% 4,700 46.5% 186,150 14.7%

4.5% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 12,750 1.0%

15s 350 11.5% 750 12.2% 0 0.0% 1,100 9.8% 198,850 15.7%

Weekly Total 3,050 27.23% 6,150 54.91% 2,000 17.86% 11,200 100.0% 1,266,700 100.0%

Total since October 2011

Cumulative

Total 345,600 27.3% 660,300 52.1% 260,800 20.6% 1,266,700 100.0%

The NYFRB said it expected to purchase $15 billion in agency MBS over the period beginning 11/14 to 12/11. This was in line with expectations and unchanged from the previous four week period. Along with $40 billion in outright

purchases, Fed buying will remain at $55 billion, or about $2.75 billion per day, which is well above the $1.0 to $1.5

billion in mortgage banker supply currently.

Housing-Related Headlines

Freddie Mac reported a 19 basis points jump in the average 30-year fixed rate mortgage rate to 4.35 percent in the week ending Nov. 14. With an average

0.7 point, the no point rate is placed at

about 4.53% percent which removes

some borrowers underlying 4s from the

refi window. This is the highest

mortgage rates have been since the mid-

September FOMC meeting when the

Committee decided against tapering, and

should lead to a further reduction in

refinancing activity in the next report

from the Mortgage Bankers Association.

o In order to increase the Refi Index to 3000, Nomura

calculated the primary mortgage

market survey rate would need to

decline to between 3.875 and 4

percent. And in order for the

index to move into the 5000 area reached when mortgage rates were in the low 3.30s, they said rates would

have to drop to between 3.0 and 3.125 percent. None of this seems likely with Fed tapering on the foreseeable

horizon.

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o 15-year fixed and 5/1 hybrid ARM rates experienced more moderate gains at eight and five basis points, respectively, to 3.35 and 3.01 percent. Meanwhile, one-year ARM rates were unchanged at 2.61 percent.

RealtyTrac reported foreclosure filings on 133,919 U.S. properties in October, or 1 in every 928 housing units. This was up two percent from September, but down 28 percent from a year ago. The backlog of delayed judicial foreclosures continues to make its way through the pipeline, with many of these properties now being scheduled for

the public auction after starting the foreclosure process last year or earlier this year, said Daren Blomquist, vice president at RealtyTrac.

Freddie Mac released its Q3 Cash-Out Refinance and Product Transition Reports last week, and given rate levels, tight credit, and still recovering housing market, results were little changed from recent quarters and along

expectations for the current conditions. For those who refinanced, 83 percent kept the same loan amount, 15 percent

increased their loan balance by 5 percent or more, while 2 percent lowered their loan. These were all little changed

from the previous two quarters. At the peak of the housing market in Q2 and Q3 of 2006, cash-out refinancings

represented 89 percent of refinancings, while refis that resulted in no change in loan amount were at 10 percent.

o The median appreciation of the property refinanced was -9 percent. Since Q3 2012, the median appreciation has been between -8 and -9 percent. The median age of the refinanced loan was 6.7 years from 6- to 4.9-years,

respectively, from Q2 2013 back to Q3 2012. Freddie said this was the highest median age since the analysis

began in 1985. Meanwhile, borrowers reduced their rate by an average of 30 percent from the old rate.

Borrower rate reductions in Q2 and Q1 averaged 34 and 35 percent as mortgage rates were lower. In 2006, the

median appreciation of the refinanced property was 34 percent and the age was just over 3-years.

o Of those who refinanced in the third quarter, 37 percent shortened their loan term, up 5 percent from Q2, and the highest since 1992. Freddie also said that 40 percent of those who refinanced outside of HARP reduced

their term and 32 percent of HARP borrowers did. The GSE's chief economist, Frank Nothaft, noted that

"Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans

during the third quarter, providing a financial incentive for homeowners to term shorten. HARP refinancers

have an additional incentive to shorten as some origination fees are waived."

o Nothaft added that "By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional

expenditures." He also pointed out that an estimated $6.4 billion in cashed-out equity would "further augment

borrowers' investment and consumption spending." This is well below what borrowers had to "augment" their

lives in 2006 which reached $84 billion.

o Fixed rate loans remained the most popular with over 95 percent of borrowers

choosing one.

Mortgage application activity declined 1.8 percent in the week ending November 8 from an upwardly

revised -2.8 percent, previously reported as -7

percent, as mortgage rates increased further after a

stronger than expected employment report.

According to the Mortgage Bankers Association's

weekly survey, the Refi Index fell 2.3 percent to

2076 from an upgraded 2125 in the prior week.

The MBA originally reported refinancing activity

had declined nearly 8 percent to 2076 for the week

ending November 1. As a percent of total

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application activity, refinancing share held at 66 percent.

o Meanwhile, the Purchase Index was essentially flat at 182.2 from 183.2 previously. Purchase activity was also revised upward in the last report to -0.7 percent from an originally reported -5.2 percent. Still, purchase

activity remains well off its average of 211 to 215 between April and June of this year despite historically

attractive rate levels and affordability. Tight credit conditions are inhibiting purchase activity and Bank of

America Merrill Lynch MBS analysts expected credit availability would tighten further beginning in January

with the rollout of QM and loan officer compensation rules. Affordability will also be impacted by continued

home price growth amidst rising mortgage rates which will impact purchase activity ahead.

o The average contract interest rate for 30-year fixed rate conforming loans jumped 12 basis points to 4.44 percent; FHA rates increased nine basis points to 4.16 percent.

The MBA's Mortgage Credit Availability Index indicated slight easing in credit conditions in October. The index rose 0.7 percent to 111.5 after declines in August and September. Contributing to the easing, they said, was reduction in

minimum credit scores on certain products by some investors. It was partially offset, however, by a slight reduction in

the availability of cash-out refis and programs that allowed for second and investor homes.

Other Domestic and International Headlines

Moody's cut by one notch the long-term senior debt ratings of Goldman Sachs (Baa1), JPMorgan (A3), and Morgan Stanley (Baa2) citing it would be less likely for the government to bailout the institutions if they got into financial

trouble.

The euro zone expanded just 0.1 percent in the third quarter, or 0.4 percent annualized, compared to an annualize rate of +1.2 percent in the second quarter.

Total Mortgage Related Issuance

Agency MBS Issuance (in blns) Year Fannie Mae Freddie Mac Ginnie Mae Total Agency MBS

2013 (YTD) $669.5 (47.8%) $384.3 (27.4%) $347.9 (24.7%) $1,401.7

2012 $801.8 (50.0%) $422.8 (26.4%) $379.0 (23.6%) $1,603.6

2011 $519.7(49.1%) $274.4(25.9%) $264.2(25.0%) $1,058.3

2010 $562.4 (44.4%) $360.1(28.4%) $343.4(27.1%) $1,265.9

2009 $767.5 (46.3%) $459.3 (27.7%) $431.7 (26.0%) $1,658.5

2008 $493.8 (46.3%) $316.1 (29.6%) $256.5 (24.1%) $1,066.4

2007 $542.3 (55.1%) $352.6 (35.8%) $89.1 (9.1%) $984.0

2006 $481.9 (52.8%) $360.0 (39.5%) $70.6 (7.7%) $912.5

2005 $481.3 (49.8%) $397.9 (41.2%) $86.9 (9.0%) $966.1

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Total Mortgage Related Issuance (in blns)

Year Agency MBS Agency CMOs

Private-Label

CMBS

Agency

CMBS

Private Label

RMBS Total

2013 (YTD) $1,401.7 $181.5 $62.5 $52.8 $7.2 $1,705.6

2012 $1,603.6 $285.1 $47.0 $45.8 $4.4 $1,985.9

2011 $1,058.3 $513.7 $35.1 $30.0 $2.8 $1,639.9

2010 $1,265.9 $477.15 $24.2 $21.6 $31.6 $1,820.4

2009 $1,658.5 $211.8 $5.1 $9.2 $21.5 $1,906.1

2008 $1,066.4 $246.5 $16.0 $3.7 $45.0 $1,377.6

2007 $984.0 $323.6 $231.4 $2.9 $655.6 $1,847.4

2006 $912.5 $317.0 $197.7 $7.5 $773.1 $2,207.8

2005 $966.1 $354.9 $164.2 $4.6 $645.3 $2,135.1

Sources: eMBS, SIFMA, Thomson Reuters

Documents

2013.11.15 - IFR Weekly