Rates Lower Still, Better Rates At Smaller Banks?, MBS Positions of Big Banks

Rates Lower Still
Mortgage prices rising (agency MBS’s, not non-agency stuff). Not only are all rates dropping, but the spread between Treasury and MBS’s is still fairly tight – further helping mortgages. The demand for agency MBS cash flows is strong, but the primary market can’t churn out enough supply. Investors know that, on average, current mortgages have sparkling credit quality, and that the risk of investing in them is minimal since both Treasury and mortgage securities are firmly backed by the same entity: the US Government. Whatever spread now exists is based not so much on fear of default, but more fear of early pay-off.

Thursday saw a lot of selling in agency MBS’s, but on Friday it dropped off a cliff, nearing $1.2 billion. Regardless, rates continue down. The 10-year U.S. Treasury note yield fell to a fresh 16-month low in Europe today with weakness in Japan and in equity markets stimulating demand for U.S. government debt – we’re down to a yield of 2.62% (weren’t we just around 3%?) and mortgages are better between .125 and .250 in price this morning. Overall it’s a pretty decent news week. Today is the Empire State manufacturing index; tomorrow will be a bigger day with Housing Starts & Building Permits, Industrial Production & Capacity Utilization, and the Producer Price Index. Jobless Claims, Leading Indicators and the Philly Fed manufacturing index will be released on Thursday.

Mortgage Fraud Stories
We’re halfway through August already, and I bet time passes more slowly when one is serving time in prison: mortgage fraud in Seattle and Hawaii.

Better Rates At Smaller Banks?
“Want a Cheaper Mortgage? Go to a Smaller Bank.” I am not saying whether headlines like this are true or false, but these are what the general public tends to see.

“There are two sides to a balance sheet, left and right. On the right side there is nothing left, and on the left side there is nothing right.” On Friday Palos Bank and Trust Company, Illinois, was closed and First Midwest Bank, Illinois, assumed, with the help of the FDIC, all of its deposits.

Low Rates Causing Long Loan Turntimes
Lenders seem to be seeing the proverbial pig going through the snake. “Turn-around times are increasing, and anyone who qualifies and has equity is trying to refi their loan – and FHA borrowers with little to no equity are doing streamline refi’s which do not require an appraisal. In the case of FHA refi’s, they will all close at the end of the month because with FHA loans the borrower owes the existing lender one month of interest, which creates even more of a bottleneck near month-end.” But the general public seems distrustful of the origination community, this is compounded by a confusing regulatory environment, and at the same time lenders are frustrated with borrowers.

Mortgage Bond Positions Of Big Banks
The National Information Center has just released consolidated financial statements for bank holding companies for the 2nd quarter which provides a good early estimate of changes in bank assets and liabilities. The top 50 bank holding companies shed $32 billion of residential MBS’s during the 2nd quarter (agency and non-agency). This decline was led by the top four banks by total assets, whose net position in RMBS declined by the same amount. One bank dropped $22 billion of agency/conventional pass-through securities. Non-agency and commercial MBS holdings declined by $2.2 and $2.3 billion, respectively, for the top 50 banks, but GNMA holdings grew $4 billion and holdings of US Treasuries was up by $8 billion. So why did mortgage securities perform ok? Recent data suggests that banks added $40-50bn in MBS in the past month! Banks change their holdings often, and the report indicated that there was no industry-wide shift in the use of Agency MBS’s.