• 10 year auction has impressive demand, but for higher rates.
• 3.45 Bid To Cover, but 3.735 % high yield with 70.94% of the bids at high yield
• MBS and Treasuries both slightly better on the announcement
• 4.5's are now down only 2 ticks on the day at 100-29 and 10yr yields are back down to 3.72+ from 3.74+

Looking at the resistance at 3.72, that's the first challenge for the bond market if it would like to improve this afternoon.  Once that breaks (if it breaks), the rest of the day is very likely "there or better," but until then, stay tuned.  For the moment anyway, risks of reprice for the worse are greatly decreased, and probably favor a reprice for the better to a small extent, though I'm not comfortable assuming a rally will take place with these auction results until we've seen some more trading.

At the last company Christmas party, loan agents lined up on one side of the room and the underwriters on the other side. The loan agents throw fire cracker at the underwriters...and the underwriters lit them and threw them back.

A long-time underwriter wrote to me and opined, "Consumers always want more than what they can afford and we gave them exactly what they wanted for the last 10 years (without any prudent financial advice). I actually like the guideline changes and feel it is necessary to eradicate some of the lackadaisicalness that I hear in some underwriter's voices.  Manufacturing quality is still a problem for the Agencies, and originating mortgage companies are still closing loans that are not 100% purchasable by the aggregators upon delivery.  Fannie and Freddie have technology in place to turn the lender's cash immediately, and then are rejecting the loans once they figure out all the doctoring that happened to make a square peg fit a round hole."

Good Morning. Happy Standardized Test Tuesday!

My nephew has Maryland School Assessment tests today, we were pre-gaming this morning.  I remember those days pretty well...mostly because they were so incredibly boring and slow. Also because the test's time slots subtracted from favored subjects such as recess and P.E.

What I should really be saying is HAPPY FLIGHT TO QUALITY TUESDAY!!!

While you were sleeping, a senior director at Fitch Ratings by the name of Paul Rawkins told folks at a conference in London that Portugal's "pedestrian approach is a concern for us". Notice I didn't mention anything about Greece??? Yeh. Thats because more than one EU country is facing some sort of ratings downgrade. Whether or not these concerns are truly legitimate or a target of trader shorting strategies remains to be proven(structural problems are evident, but are traders making it worse?)...either way, US bills, notes, and bonds are/will continue to benefit from weakness abroad. We just have to hope the mainstream media doesn't start to focus in on our state budget issues....cause then we will be in trouble and we could start to see headlines like this: FITCH WARNS OF POSSIBLE DEFAULT IN EUROZONE

Immediately following the 3yr Treasury Note auction, treasuries weakened while MBS held steady.  Since then, MBS have lost a few ticks, but the 4.5 remains positive on the day, up 1 tick at 101-07.  The 10yr note is also up a tick leaving the yield just under 3.72.  The 10yr's post auction selling turned the corner very much in line with yesterday's high yields suggesting a shift of guidance to tomorrow's auction.

.

MBS is building a case for support just over 101-06, but as volume remains fairly light, again, the emphasis is even more squarely on tomorrow's auction than it already was.  Until/Unless 101-06 breaks down in a significant way, the chances of reprices for the worse remain limited to "knee-jerk only," but we're not seeing justification for that. 

• MBS Off To The Races with 4.5's up 8 ticks to 101-15!
• 10yr up 5 ticks on the day dropping yield to 3.70 (through post auction resistance)
• Reprices for the better = highly likely

From the Ninja:

Mortgages are still on hold as today’s 3yr note auction held few surprises-everyone loves the shorter end of the curve; don’t you? $40 billion notes maturing in 2013 is quite commonplace and the sheer size of the issue is no longer an emotional and or logistical challenge to anyone directly (or indirectly, on the bid) involved. No real change to the way we do and or perceive business here in MBS secondary trading land. The market is better into lower and or range-bound rates, like today, and not as excited should the treasury market break out to the upside to prices (and lower interest rates). The best thing I could relay to you, as mortgage brokers, would be a day with modest prices upswings that lower interest rates and compresses spreads even tighter against said rates (30yr mortgage rate closes in on 10yr note).  The influx of corporate issuance and hedge unwinds (sell corporates, buy treasuries as an offset) has given the concessionary back up to interest rates (ahead of tomorrow’s 10yr note offering) some stabilization.

• 10yr Notes progressively improved into the PM , ending 5 ticks better on the day with a yield of 3.70.
• MBS fought off   much of the AM weakness in tsy's, and rallied just as well into the PM, reaching 101-15 at 4pm.
• But then we ended 4 ticks down on the day at 101-01!  WHAT?!?!?

So you're tellin' me MBS effectively erased all gains from the past two days?! 

Not exactly...

I'll let AQ explain...

--------------------------------------------

If you haven't read the following description of the agency MBS settlement process...please don't skip over it as it may save you from having to change your pants when next month's settlement rolls around. If you have read it...go over it one more time just to make sure the underlying logic is clear.

We commented last week how a lot of people didn’t know what HSBC stood for...

If you go back to when they bought a bank in Buffalo, New York to established themselves in the U.S.  The joke was that HSBC stood for "Holy ____,  Buffalo's Cold.”

City National Bank (Los Angeles) was in the news for paying off all its TARP money last week, but the real story is how they became L.A.’s prestige bank in the first place. 

Frank Sinatra’s son was kidnapped on a Friday in 1963, and the singer called up Bank of America, Security Pacific and a few other big banks asking for $240,000 to pay the ransom money.  The big banks told him to come in Monday morning and fill out a loan application. When he called City National, Chairman Bram Goldsmith told him “Come down to the bank as fast as you can and we’ll have your cash ready.”  Sinatra was so impressed that he told all his Hollywood friends to bank there, and it soon became the bank for the rich and famous of Hollywood and Beverly Hills.   Even today, it’s considered a prestigious thing to do your banking with them.

I am kinda bummed no one laughed at my Kathy Ireland reference in MBS OPEN.

Her dress was so tight you could see her liver processing the booze (that's a rumor). I suppose I could have poked fun at Sarah Jessica Parker's "Queen of the Nile" get-up. Ugh. You guys are killing me. Is this one of those "you had to be there" jokes? I know I am setting myself up to be mocked because I watched the Oscars...but come on, there is humor in everything we do. (Like I said, I lost control of the remote. Other men: don't pretend you didn't watch. You know what I am talking about here!)

Ok I am done pretending I am Perez Hilton. HAHA back to the markets.

Chicago Fed President Charles Evans, a middle of the road on inflation non-FOMC voter, shared prepared remarks with the world this morning. I didn't hear much that could be considered "news worthy". The one thing I might call attention to were his sentiments surrounding the jobs market. He basically said the Fed has realigned their "status quo" employment levels...meaning the Board will be more accepting of higher levels of unemployment in the future.

Often I start the commentary off saying something witty, but I couldn't think of anything clever so I thought I'd suggest you take a look at this video about, of all things, seat belts. It is making the rounds, and with good reason. 

The Federal Reserve has a little more than ten business days to complete their well-publicized purchase of agency mortgage-backed securities (MBS). Last week it bought $10 billion, breaking their 3-week streak of $11 billion. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are/were eligible assets for the program. Everyone knows that the end of the program is imminent.

I am going to go out on a limb here, which is rare for me, and suggest that the consultants, market gurus, bloggers, paid services, etc., who firmly believe that mortgage rates are going to go up 50 basis points after March 31st are wrong. If NASA told you that it was certain a meteorite was going to hit the US next Tuesday, would that change your behavior now? You bet it would. Yet dealers are not seeing companies sell their entire pipelines and/or expected production (currently estimated at less than $1 billion a day) for April and May. If speculators are stocking up on puts on MBS's, they are keeping it well hidden. (Of course, the option market for mortgage securities is practically nil.) Mortgages have been getting tighter and tighter to treasuries, which one wouldn't expect if mortgage rates were going to skyrocket, and yesterday current coupons were the tightest they'd ever been. And why would any mortgage investor (currently hedge funds and money managers) want to own pools at these price levels if they were going to be two points lower in three weeks? Of course, no one wants to sell something that they don't own in this market. I don't think that the supply is there, no one wants to sell what they don't have (exposing them to some extremely volatile swap and role markets), and with Fannie & Freddie buying back delinquent loans, I think mortgages hang in there with other rates.

Did anyone happen to catch Saturday Night Live this weekend? 

Alan, the lovable moron from "The Hangover" was the host. I suppose I should share his real name too: Zach Galifianakis. I usually watch SNL on Hulu whenever I have time...but this weekend I happened to be in front of the boob tube to catch it live. I have to say, that entire cast is fully devoted to their careers in comedy. If you missed it or just need a good laugh again...take a few minutes of your day and watch some of the clips, especially the  "Kissing Family" skit.

My ribs still hurt from laughing. Seriously.

Trading in the rates market today has been slower than Allen Iverson's exit from the NBA..but not as painful to watch. 361,592 10 yr contracts have swapped hands in the rates futures market, that is well below average for this time of day. Yawn. Price action has been fairly muted and mostly sideways since yields pushed higher at the data-less open.

• No material change since 10:30AM
• MBS 4.5's unchanged on the day at 101-07
• 10yr note 4bps higher on the day to 3.72
• Stocks were up, down, up, closed flat
• No data tomorrow either, then 3yr note auction at 1pm
• Fed Evans at 930am
• Big Picture: something's gotta change, or long, slow, grind continues.

I wanted to show you the same chart from the Afternoon notes, now updated for the past few hours for the sake of comparison, but I had to send it off to whatever company that is that prints those little activities on my kid's dinner menu where he's supposed to find the differences between two pictures.  They heard about those two MBS charts and were thrilled at the possibility of just putting out one puzzle this year that would keep everyone guessing as to whether or not there was even ONE difference, let alone the three differences required to get the extra corn dog.

• ridiculously flat trading in MBS and Tsy's
• low volume, sparse data calendar, looking toward auctions
  
• Did we mention flat trading?
  

You'll rarely see MBS and Treasuries trade this flat for this much of the day.  From 10:45 on, MBS haven't moved more than 1 tick and tsy's not more than 1bp.  Volume is light on both fronts with MBS just over half recent norms.  Perhaps even more telling, a quick scan down Fannie, Freddie, and Ginnie MBS from 4.0 to 6.0 shows every security in that range UNCHANGED on the day, except Ginnie 4's, currently up ONE tick.  Yawn.....

Our FOCIS –plus study has a section on Home Value Code of Conduct (HVCC) compliance.  Warehouse lenders in particular are interested in whether a mortgage company has a written HVCC policy and what process lenders use to comply.  Some lenders have an internal appraisal management process to comply.  The process involves approving appraisers for their panel and having someone, not involved in the origination process, select appraisers randomly.  Others use an external appraisal management company (AMC) that has a stable of appraisers that are selected randomly.

What is the impact of HVCC? 

HVCC has been a challenge for originators who don’t have the flexibility they had in the past.  Some mortgage bankers complain there are quality issues with appraisals and order a review appraisal before approving a loan.  Some appraisers are complaining they can’t earn the fees they earned in the past if they are part of an AMC.  It seems all participants have something to say about HVCC.

Good Morning. Happy Monday.

I don't know what the weather was like this weekend where you live, but here in the DC/Baltimore metro area we finally had a change of pace from snow and ice: SUN!  Every field was occupied with some sort of sporting event or recreational activity...mostly lacrosse where I live near Annapolis. After a good run and few hours of lax, I feel recharged and ready to go for a productive week ahead---I hope you do too. Here is a quote to get you motivated if you're dragging a bit:

"Even if you're on the right track, you'll get run over if you just sit there" -Oklahoma's favorite son, Will Rodgers

Ok. Wake up now. Time to get your purchase market campaign perfected.

When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn't work that way. So instead I stole a bike and asked Him to forgive me.

Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency's insurance limits). Sun American's (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was "absorbed" by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah's Centennial Bank are now being run by the FDIC, with the help of Zion's Bank, at a cost of about $96 million.