“Habit is stronger than reason.” – by George Santayana

January is scheduled to be a big month for Freddie and Fannie, in that the Treasury is expected to release plans for their future. Merrill Lynch released some conjecture about upcoming news, which will probably come out after the State of the Union address on 1/25. Merrill reminds us that “The GSEs are in two very different and distinct businesses. One is in the Guarantee (or “G” fee) business which is essentially an insurance business and where a big chunk of the losses came from in the 2008-09 period. The second business is the retained portfolio business where they own mortgage products on their balance sheets and do so because it is accretive and where the bulk of the profits come. Incoming Republicans have been very vocal about GSE reform and all of the commentary seems to be negative for the retained portfolio business at a minimum, and currently, under the Senior Preferred Stock Purchase Agreement, Fannie and Freddie must shrink their retained portfolio’s at a 10% per annum clip.”

The report continues to opine, “Regardless of the content, Republicans will dismiss it as spin and cry for immediate action on reform that includes, among other things, a much more rapid wind down of the retained portfolios. The market is very complacent on the topic of GSE reform and few have gone through the calculus of, for example, what something like a 4 year wind down of the GSEs would mean to absolute rates, Agency debt and mortgage valuations, spreads and volumes. Or what an economic based mortgage insurance (or re-insurance) premium assessed by the government would do to housing prices and the macro economy in general.

HUD offered up a couple Mortgagee Letters yesterday, in what some would say are somewhat obscure topics. The first letter addressed “Claim Process for FHA Refinances of Borrowers in Negative Equity Positions (ADP Codes 821, 822, 831, or 832)”, and the second dealt with the “Elimination of the Master Appraisal Report (MAR).” Check them out at HUD

At least rates seem to have stabilized. Yes, MBS volumes are on the light side, as you’d expect with these pipelines, but MBS prices are doing ok. Yesterday lower coupon product gained ¼ in price, and about .125 on current coupon product while the 10-yr yield closed out the day at 3.34%. As we learned, Housing Starts fell, as expected, while Building Permits were up almost 17%, possibly due to changes in regulations in NY, PA, and CA but also due to a huge increase in multi-family permits. Builders continue to be faced with the economic reality of the high current and forecast future supply of homes on the market.

Today closes out this week’s “docket of data”. Initial Jobless Claims came out at 404k, down from 441k, a significant drop. Continuing Claims dropped slightly, and the 4-week moving average dropped 4k. At 7AM PST, 8AM MST we have Existing Home Sales (expected to show an increase), Leading Economic Indicators (expected +.6%) and the Philly Fed. At 11AM EST we find out the details of next week’s 2-, 5-, and 7-year Treasury auctions, and at 1PM a $13 billion 10-year TIPS auction. Currently the 10-yr is 3.39% and MBS prices are about .125 worse from Wednesday.