MBS Monetization Expectations Good For Massive 0.04% Plunge In Mortgage Spread, Sure To Unleash Refi Tsunami... Or Not

Tyler Durden's picture

Anyone who actually read Daniel Tarullo's speech yesterday setting the stage for a new round of MBS monetization would be forgiven to expect a major drop in mortgage rates. After all the Fed board member said, "by increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates." There is no way he can be wrong, after all he is a Fed member (although no Ph.D., instead he has an uber-valuable J.D.). And there is no way the market can not be pricing in what is now obvious. So how does the 10 Year UST- 30 Year mortgage spread look like this morning post the "pricing in" - well it is tighter. By a whopping 0.04%! Surely this epic move in spreads will be the catalyst that unleashes hundreds of billions in refinancing activity and pushes the value of the US mortgage market higher by trillions of dollars. Or not. As the second chart below demonstrates, Operation Twist, whose purpose incidentally was just what Tarullo is suggesting less than 2 months after QE3 Lite came on the scene, has now been a total disaster. As the Mortgage Brokers' Association reported on Wednesday, the MBA mortgage applications index was down 15% in the week ended Oct. 14. This was the year's biggest decline! Worse, the refi index was down a massive 17% in the week! What does this mean? Well, that we have reached a point where prevailing rates on Mortgages have absolutely no impact on either refis or home prices at this point: anyone who could have refied, has already done so, probably many times over. Everyone else is simply not eligible. But yes, MBS monetization will sure help... all those banks that have loaded up on MBS in anticipation of just this (like Bill Gross as we first speculated back on October 11) to sell them right back to the US taxpayer. And, of course, all those who have been wisely stocking up on precious metals in anticipation of just this latest episode of Fed idiocy. Remember: as we have been saying since day 1: the Fed knows only one thing. To Print. And it will. Over and over and over.

MTG-UST spread:

And 10 Year vs MBA refi index:

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Snakeeyes's picture


We continue our Brawndo approach to housing and mortgage markets.


riphowardkatz's picture

Add that to a gov backed 10 year that covers the negative equity, move 30 year rates to 2% and all the housing doomsayers will be weeping as they hold onto their barbarous relics.

Village Idiot's picture

For those looking for some point of reference from the ONE DAY low in 30 year mortgage rates (announcement of twist/bad day for europe) and where we are as of today.  The following quote should be considered a competitive retail quote based on a 30 day lock:

  • LTV - 90%
  • FICO - 720
  • No Cash Out
  • Conforming (417K max) 

Our low day as referenced above...4% (all non recurring closing costs paid by bank/free loan). The amount of credit to borrower on that day would have been approximately 1.5% of loan amount, so amount of dollars available to pay closing costs varies with loan size.

As of today...4.5%. 

Of course, there are a few variables.  A high loan amount might get you to 4.375% with no cost/free loan, but my point here is that mortgage rates have to realistically drop a full .5% to get us back to a no cost loan @ 4%. No big swing, yet.

There are still people who fit these parameters, and like Tyler points out, have been refinancing on the way down. The big question as many point out:  How many homeowners are in a position to refinance under these guidelines (or under the GSE relief programs that allow negative equity up to 115% of value and easier qualifying...higher rates) to make a meaningful difference without some sort of nationalized program that clears many of the hurdles currently blocking access to lower rates.  Not many...

Personally, even though my business would benefit from a large scale refinance boom, I would rather see a normal market correction in housing. Hanging on to an emotional attachment in housing when you are underwater at these price levels (regionally speaking) equals debt slave. This clinging to artificially high values is going to end badly for someone...

From a purely non-emotional investors eye...All  I have to do is look back to the S&L debacle of the 90's.  REO was unloaded as fast as possible and as a result, the market for RE turned in less than five years.  I know, I know...it's different this time...it would be counter productive for the banks/GSE's after all the money that has been pumped in...doomsday.  It's going to end badly for someone...

You want to see things get going in RE? PRICE DESTRUCTION! 

And how about a little SAVERS RELIEF?  Jesus Fucking Christ already...


Please return to your globally televised freak show...

jdelano's picture


Mohan's picture

Great.. now they can ramp it up even higher.

falak pema's picture

Euro commissioner says a rating agency can no longer downgrade EU instruments/sovereigns. At this rate S& P will it be out of a job in Eurozone?

jdelano's picture

A source?! Why the hell would I need a source?!


It was a joke--as in, the 3:30 rumor will be...'S&P Just downgraded France'

Going Loco's picture

Because otherwise you are the nuthead who is yelling "Fire" in a crowded building.

lolmao500's picture

BS. Not yet.


S&P likely to cut ratings of France, others if economies crash

Standard & Poor's will likely lower the credit standing of five European nations, including top-rated France, by one or two notches if the region slips into recession and government borrowings increase, the rating agency said in a report.

The stress-test report assesses the capacity of the European Union and the IMF to support the euro zone under two possible scenarios -- a double-dip recession and a recession with high interest rates.

"Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios," said S&P in the report dated October 20.

A worst-case economic scenario would also likely prompt the recapitalization of numerous banks in Spain, Italy, and Portugal, S&P said, adding that current support mechanisms may not be sufficient if conditions deteriorate beyond expectations.

"France would likely be downgraded to 'AA+' from 'AAA' because of a deteriorating fiscal position, even if the amount of stress applied remains modest," S&P analysts said.

The Profit Prophet's picture

I predict that if the Euro project collapses next week and the French banks get nationalized, we may see an S&P downgrade of France sometime in late 2013 (just like what happened in the US).....sarc/off

T.E.I.N. everyone! 

moldygoat's picture

I can only think all this delay delay delay bullshit is to get us to 11/11/11. Seems like a good day for a cyber 9/11 11/11, the return of stuxnet count Duqu.

Rally on untill then!

AldoHux_IV's picture

Good for boost in financials to boost their ability to handle any disruptions/sarc.

End the fed otherwise, wealth transfer bitchez!

Lone Mad Minute Medic's picture

Big deal. So France has been downgrade. That should be good for a few hundred point up!

Ned Zeppelin's picture

The stubborn truth: "anyone who could have refied, has already done so, probably many times over. Everyone else is simply not eligible."

-Michelle-'s picture

It's more than stubborn.  It's rebarred and set in cement.  Then they poured a ton of sand over it.  And nuked it.

I would love to refi.  I just can't scrape up the $80k or so that I would need to do it.  But they tell me that the economy is recovering, so maybe next year.

Ned Zeppelin's picture

This commone sense observation tells you that all of this talk of lowering rates "to help homeowners" is a lot of bullshit - intentional lies -  and a cover for the real reasons. Lower rates means higher prices for the MBSs, all things being equal, so they hold up the TBTF balance sheets and can be used as collateral for zero percent loans from the Fed. The ponzi must be propped up.   Of course, all things are not equal, since if you take a peek into private, non-GSE MBSs from the good old days of 2003-2008 they are full of defects in formation (fraud and defective assignments) and so regardless of rate, or rating agency score, a discount has to be applied to MBSs for the uncertainty factor. The GSE MBSs are no picnic either, although I do not think they suffer from the document problems that are a metastasizing cancer in the private MBSs.  See the very recent Masschusetts Supreme Court case invalidating title acquired from a foreclosing bank.

PulauHantu29's picture

Good work, Ned. I had read over 80% of the title clsoings between 2005 and 2008 were 'defective."  The same thing happened during the GoGo Housing Boom in the mod-1980's. Many could not sell thier homes and raw land b/c of major defects in the title closing when they bought it.

Problem is you may not reazie the problem for years down the road when you go to sell...then you need a lawyer and costs rise exponentially.

I would stay away form most RE now of any shape or form ...prob for a decade until all the fraud, mistakes, etc are worked out.  Add to that Shillings prediction of contiunued decline of at least 20-30% more in RE values...so why buy at all?

GeneMarchbanks's picture


Any way they could intervene in the happenings of the PrimeX?

Christoph830's picture

Talk is cheap.  If this was the panacea for our problems, they would have announced this at the time of Operation Twist. 

Fade this BS.

Tarullo's speech was just more scraps for the Algo-dogs.

The Fed is desperately praying that the stock market can stay propped up long enough on baseless rumors so that the jobs situation can improve...


sabra1's picture

wrong! markets propped up until total money transfer from sheeple to the banksters is complete! they then crash the markets finishing everyone else off! after they own it all, they cull the population, for, we're totally useless to them now! easier to control a small group than a large one! that's the plan!!!!

karzai_luver's picture

Why would anyone bother hiring when you can get a nice risk free return in the ponzi?


Does not compute anymore.


Paper don't need no stinking medicare.


Mercury's picture

I would buy a mid$ US res. property right now if rates were 1%

I would not

firstdivision's picture

Damn, look at the trajectory of the 10Y yield.  Are all the worlds CB doing the nuclear option today?

junkyardjack's picture

Printing is the only way out of this.  Wages are too high so no one will hire, there is a ton of debt that needs to get cleared out, people don't understand deflation, the only thing left is to print the nominal problems away

firstdivision's picture

Wages are too high so no one will hire

This, I would have to severely disagree with.  Average wages are quite relatively low, especially compared to all other measurements.  Well I guess if you're referring to CEO's, COO's, CIO's, CFO's, etc., etc., pay; then I would have to agree.




equity_momo's picture

Sarcasm or are you going for the weeks biggest moron award?

azusgm's picture

If employers could see demand ramping up and risks going down, they would hire. I don't see wages as the big problem.

It's the uncertainty. Some businessmen have taken to the bunkers and don't intend to peek out until after the next election. They hope for a change away from Obama.

karzai_luver's picture

Bullshite sonny, all this historic cash on the sidelines was built during the ONES tenure, right!


spin it again no tellin what may fly out.


buzzsaw99's picture

I hope the bernank gets a lip fungus that rots his whole rat bastard face off.

Lone Mad Minute Medic's picture

Maybe what we need is some Bull news to knock this market down. This perm bear shit just keeps everybody on the loser side of the market. This latest bull run in the bear market has been A very good opportunity for making money during this correction in a bear market. But 99 percent of you have been holding fast to your losses.

jdelano's picture

Yup.  Don't care.  My hate keeps me warm.

lolmao500's picture

So now the only way to inflate the prices of houses is for the government to buy them all.

karzai_luver's picture

they have already bought them all many times over, they just don't have the doc to prove it.



Everybodys All American's picture

I think this will be a huge fail. The refinance cycle has already taken it's course. Anyone left trying to refinance now needs considerable help more than likely because they are underwater. New issued debt needs to replace the older maturing issued debt. If the there is very little to be re-issued because the refinance cycle is over then the benefit for anyone banks included is minimal.

This shows the limited effect the Fed or anyone at a certain point can have on the economy and that eventually all thier bullets are spent. But I don't have a PHD.

vast-dom's picture

Clearly all of this is BULLISH. How the fuck are markets up? Please God, Santa and Tooth Fairy pray tell!

jdelano's picture

This is insane.  This is really completely fucking insane.  Good news is, I can stay solvent longer than the market can stay irrational.  Fuck this final, admittedly impressive attempt to blow out the shorts.  I'm not going to make any money on these trades anymore, but I won't take them off.  Fuck you Wall Street.  And when you're literally burning down from the deluge of molotov cocktails, I will be watching at home, drunk off my ass on champagne and laughing maniacally.....

karzai_luver's picture

if you have been short during this period of law breaking and ponzi scams, then god help you.

it maybe a scam but it's our scam.


jdelano's picture

And the retribution will be ferocious.  Get your last hurrahs in.  

Pure Evil's picture

How long before rates turn negative and we pay foreign borrows with visa's to purchase homes in Detroit?

Pure Evil's picture

I didn't know undocumented workers could afford $500,000 homes.

What we need are more folks that can afford abandoned ghettoized crack houses and fill them with twenty people per room while blasting mariachi music throughout the neighborhood.

Dr. Gonzo's picture

Um. Isn't the goal to give good money for worthless assets to their banker friends and also to force the hands of the decent people who are shorting their shitty banking stocks to close their positions. Not working. I just doubled my short position at 10am. Dam the Torpedos. Full speed ahead!

buzzsaw99's picture

one of these days the people will give the bernank the mussolini treatment. hopefully sooner rather than later.

Lone Mad Minute Medic's picture

Because your being led in one direction. Herded into the slaughter stalls.

stormsailor's picture

technically speaking, if the /es clears 1236  it should be clear up to 1256 @ chart analysis. 

pure lunacy per all the data but it is what is.

DOT's picture

Nice try losers ! I will not lever-up.

Cash controls the RE market.

No way in hell am I going to let

equity go to a Bank. But that's just me.