Non-Agency MBS Prices Jump But Will Confidence Last?

New York-Between the government's earlier Public-Private Investment Plan move and the Financial Accounting Standards Board's mark-to-market action, it looked early last month as if the bogged-down private-label mortgage-backed securities market might be loosening up a bit.

But how far the accounting move goes toward restoring liquidity rests on whether it helps or hurts market confidence in the long term and how that plays into the fate of the slumping economy.

Non-agency residential mortgage-backed securities prices at press time had risen to levels "not seen in some time," said Jim Blinn, president of Securities Quote Xchange, Chicago. Non-agency commercial mortgage-backed securities prices also had bounced and to a greater extent than their residential counterparts as a result of both the Public-Private Investment Plan and the government's Term Asset-Backed Securities Loan Facility, said Ron D'Vari, chief executive officer and founder of New York-based New Oak Capital.

Previously dropping non-agency mortgage-backed securities prices first stabilized then rose slightly in the wake of the government's earlier Public-Private Investment Plan, according to Mr. Blinn and other market observers. But the Financial Accounting Standards Board move contributed to the boost in the securities' prices. The accounting move could improve how the private-label mortgage-backed securities hold look on paper.

There has been discussion the change could be applied to and improve first quarter earnings. That could improve banks' ability to raise capital. Financial institutions like funds and insurers could be convinced by ensuing improvements to banks' overall financial results to take more equity stakes in them, said Mr. Blinn. In addition, it could make banks more likely to hold on to private-label mortgage-backed securities than sell them at fire-sale prices, he said.

At the time of this writing, Mr. Blinn said he would put 60%-to-40% odds in favor of an upturn.

The accounting move may be temporary, ending with a return to MTM accounting when the market becomes active again, he said. He and other observers said there have been three or four upticks in private-label mortgage-backed securities' prices in the past year and that a bottoming out of the market is not yet certain.

"Nothing is fundamentally different [economically]," said Frank Pallotta, executive vice president at Loan Value Group, Rumson, N.J. "I don't think this is a bottoming out."

Economic indicators remained mixed at best at press time, although there was some good news for the mortgage market in terms of another slide in the average 30-year rate to another Freddie Mac survey record low at 4.78%.

There also were indications of a pickup in pending existing home sales, according to Freddie Mac chief economist Frank Nothaft. But the most recent Standard & Poor's/Case Shiller home price indices results were not so optimistic. Mr. Blinn noted that historically "breakouts" in price have preceded a bottoming out but usually there are several ups and downs before a bottom to the market seems clear. Mr. D'Vari said that while the Public-Private Investment Plan may be positive for private-label MBS, uncertainty about government modifications and cramdown plans might continue to put negative pressure on securities.

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