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New day, same story.  Mortgage backed securities are getting a dose of the “new normal”.  The point here is that the Fed has been buying MBS for the past 14 months, starting at an average of 100 billion a month and then tapering off to 50 billion a month.  Within this process, they (Fed) has bought the majority of the new issue MBS and now owns 20% of outstanding MBS paper.  That part of this Quantitative Easing process will end soon (end of March).  That said, the street is being overwhelmed with mortgage paper by originators, servicers, and portfolio types that make this their business.

The spike in Austin mortgage rates and worsening prices will be worked into the system until we find a new MBS buyer/buyers to replace Uncle Sam.  The other part of this market “two step” happened yesterday after the stock market closed.  That’s when the Fed raised the Discount Rate.  For the record, the Discount Rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Federal Reserve Bank lending facility, the discount window. Usually, these loans are extended to commercial banks, etc. for a short period of time.  The move was technical in nature but does start the ground work for monetary policy changes to remove Quantitative Easing measures put in place over a year ago.

Earlier today, CPI, inflation at the consumer level, hit the tape plus .2% with the core index (ex-food and energy) down .1%.  The print was better than expected and points to inflation well under control.  Market action was positive for the 10 year note and MBS post CPI with mortgage backs unchanged to up a tick or two.  That mini rally quickly faded as mortgage players entered the market, selling on the reality of my opening few lines.  Currently, the 10 year note is off 1/32nd to yield 3.81%, mortgage backs are off 7/32’s, and stocks are plus 36 points on the big board.

The next 30 days are going to be tricky as volatility and the changing dynamics will be difficult to handicap.  Given what we know, you should error on the conservative side, locking your interest rate sooner than later.  Once this period of adjustment is priced in the system, we expect mortgage pricing to rebound (get better) as MBS product will look attractive on a yield basis and the overall economic picture will still be a concern.