Technical Explanation Of Mortgage Trading, And 4% Rates*

So your Lock Desk is getting heat from the agents about pricing. And they say, in addition to the profit margins the owners want, there is the spread between best efforts and mandatory loan sales that investors are charging. “Well over a point, maybe even two points now,” they claim, “that’s why we’re getting beat by XXX up the street.” But of course mandatory loan sales imply hedging, and dealing with currently low pull through, and one method of hedging means finding securities dealers to sell mortgage securities to in order to offset the risk.

In “the old days”, this would mean sending some financials and an application to companies such as Goldman Sachs, Citigroup, JP Morgan, Greenwich Capital, First Boston, Morgan Stanley, etc., and if the company’s net worth was $500k or above, a “Wall Street firm” was bound to approve you. Those days are gone. The places of the more traditional firms have been taken by companies like Multi Bank, Mesirow, Bank of Oklahoma, etc. And the larger, more traditional companies, such as Cantor Fitzgerald, will typically require a net worth of $5-10 million and up, which is beyond the majority of lenders. Invariably, the bid/ask spread has changed, and what folks see “on the screens” may or may not be the price at which the securities actually sell.

And what about the super conforming pricing? Freddie and Fannie securities are currently limited to having 10% of the pool be made up of jumbo conforming. Investors are continuing to adjust their intake of this product using pricing, thus relying on supply and demand, at a spread that can change every day, to regulate their purchases of jumbo conforming. After all, if someone like Wells or Chase can get 10% of their conforming volume at a 2 point hit that the originator is willing to endure, and sell the security at the same price, why not?

Certainly the Fed buying MBS’s has helped. The Federal Reserve reported purchases of $19 billion from Jan 15 – Jan 21. And remember that production (locks) has seen a decline this week, and dealers report that origination totaled only about $1 billion yesterday. The Fed is buying Ginnie’s, Freddie’s, and Fannie’s, with the bulk of their purchases currently being securities backed by Freddie Mac. Why? As one trader put it, “Since these are likely truly ‘buy and hold forever’ trades, the Fed will realize the value of the payment delay. And to the extent the FG/FN swap is below ‘fair value’ the draw will be to Freddie Golds.”

Most of their interest has been in low coupon securities, made up of 30-yr conforming rates in the high 4’s or low 5’s. If their goal is to support mortgages at these coupons, why would any servicer want to own 30-yr conforming loans at higher note rates if they have a high probability of paying off early? “In the old days”, back when I had a FNMA Gold Book* on my desk, for every .125 change in rate, using a 4:1 buy-up, a broker could see a .5 improvement in price. No mo’. Investors are not willing to pay historical buy-ups for loans that may not be on their books for long.

Rates For Toll Brothers New Homes: 4%
How much money does Toll Brothers have? Enough to offer a 3.99% fixed mortgage rate for 30 years, for loans of $417,000 or less, at 0 points. Borrowers must have a minimum 720 FICO, and loans must be 80% or less LTV with no PMI.

Market Update
What is going on today? Well, Asia is closing up ahead of a holiday week (China is “closed”, although Japan is “open”). The British Pound is at a 23-yr low versus the dollar, but the Yen is trading at a 23-year high versus the dollar. And one trader sized up the mortgage activity; “At the 3pm close, MBS traded up to 10+ ticks better versus 10 year Treasuries and 3+ ticks better versus 5 year Treasuries. Lower coupons again outperformed higher coupons and conventionals outperformed 15 years. GNMAs underperformed FNMAs by up to 1+ tick. Golds generally traded in-line with FNMAs. Domestic money managers, banks and servicers were all better sellers of MBS yesterday, while the Fed continues to be a buyer.” With no news out, the attention will be on the stock market, which is expected to fall more today; the 10-yr is at 2.59% and mortgage prices are about .125 better than yesterday afternoon.

Daily Humor
Thank you Roger S. –
Murphy showed up at Mass one Sunday and the priest almost fainted when he saw him. Murphy had never been seen in church in his life. After Mass, the priest caught up with Murphy and said, “Murphy, I am so glad ya decided to come to Mass, what made ya come?”
Murphy said, “I got to be honest with you Father, a while back, I misplaced me hat and I really, really love that hat. I know that McGlynn had a hat just like me hat, and I knew that McGlynn comes to Church every Sunday. I also knew that McGlynn had to take off his hat during Mass and figured he would leave it in the back of Church. So, I was going to leave after Communion and steal McGlynn’s hat.”
The priest said, “Well, Murphy, I notice that ya didn’t steal McGlynn’s hat. What changed your mind?”
Murphy said, “Well, after I heard your sermon on the 10 Commandments, I decided that I didn’t need to steal McGlynn’s hat after all.”
The priest gave Murphy a big smile and said, “After I talked about ‘Thou Shalt Not Steal’ ya decided you would rather do without the hat than burn in Hades, right?”
Murphy slowly shook his head and said, ‘”No, Father, after ya talked about ‘Thou Shalt Not Commit Adultery’, I remembered where I left me hat.”

*Fannie Mae Gold Books, literally gold colored, basically, were used to price loans, when Fannie or Freddie would post a single rate, and originators setting rates and prices for the day would use the charts to buy up or buy down rates to determine the price.