MBS... More than a Case of the Mondays

In everyone's favorite cubical movie "Office Space" our protagonist is accused of having a case of the Mondays when he doesn't show up his chipper self when arriving at the office. For those who have seen the movie, I don't need to tell you, he doesn't have a case of the Mondays. he truly loaths his job and is simply acting how he always feels.

This may also be the case with the mortgage backed securities market which after a couple days in the green has turned around and sold off all recent gains and then some. At this point in time there is a clear down trend in the MBS markets which is forcing interest rates up. Investors are looking other places for returns, and it appears as if this trend is going to continue.

With the stock market moving forward and posting gains as if everything was as it should be, there is little reason for anyone to sit out the rally, and the fear that brought people into our long term market has wained and they're moving back into the short term markets at the expense of the long term bond markets.

The effect is immediate and interest rates through reprices have slowly but surely trickled back up. It's unfortunate because most people looking to take advantage of these low rates are going to be stuck either closing on a rate that is much higher than they had hoped, not closing at all, or waiting in hopes the market returns.

It is this third option that I find the most interesting. Considering the guidelines for approval right now, you really need to be an A-paper borrower to secure these best and lowest rates which means documenting income, assets, etc... Most A-paper borrowers refinanced last year when they had the chance to secure these low rates in 2010. This time around they are simply trying to improve their position. This means these higher rates currently available are of no interest to these clients... tehy already have a great rate... which means not closing (at the current pricing) or waiting it out to see if they drop back down.

I anticipate when loan volume drops off a cliff, which it will in the near future due to rates rising, banks will have no choice but do what they can to lower rates and entice borrowers back to the finance table.

For now, we're trading in a range that is producing rates higher than they have been in recent weeks. Hopefully after labor day, when banks recognize they are not closing the loans underwritten before labor day, they'll cut into their profit margin and do what they can to reduce rates.

Let's hope secondary cooperates and the mortgage backed securities market rallies hard on the buy side.