Last week,  MBS volume was overall slightly above average, according to TradeWeb data. MBS also outperformed five- and 10-year notes, particularly higher coupons.

By comparison, te previous week was mostly about up-in-coupon trades despite increased prepayment risk as a result of President Obama's housing plan.

Investors believe that prepayment risk is more than adequately priced in and that while speeds will increase, they won't reach 2003 peaks. A Treasury sell-off from Monday into Friday as supply worries edged out weak economic data also had a hand in the move up.

Banks, money managers, hedge funds, and servicers actively sold lower coupons to move higher with 5.5s and above seeing the best performance. The Federal Reserve, of course, was a steady and significant presence on any given day, while overseas  investors were also a regular buyer, particularly in GNMAs.

Originator selling last week averaged $2.7 billion compared with $2.9 billion in the previous week. Supply was primarily in 4.5s and, to a lesser extent, in 5s.

In other mortgage related activity, 15s outperformed 30s, conventional dollar rolls were slightly pressured; GNMA/FNMAs wre slightly higher; and specifieds were more active with selling as the week progressed.

The following are update on the state of the U.S. housing market. New home sales fell a larger than expected 10.2% in January to a seasonally adjusted annual rate of 309,000. From January 2008, new home sales were down 48.2%. The median price of a new home was down 13.5% to $201,100 from a year ago, and was down nearly 10% from December.

Meanwhile, existing home sales in January declined 5.3% to a seasonally adjusted annual rate of 4.49 million units, and is down 8.6% from January 2008. Consensus had expected a 1.1% increase. Based on current inventory, months' supply stands at 9.6-months, up from 9.4-months in December.

The Federal Housing Finance Agency reported record declines in the fourth quarter of 2008 in its seasonally adjusted purchase-only home price index of negative 3.41%, or negative 13.6% annualized, compared with  negative 1.99% ( negative 7.96% annualized) in the third quarter.

Year over year, prices are down 8.2%. For the month of December, prices actually rose 0.1% for the U.S. with five out of nine regions reporting modest gains from November.

The S&P/Case-Shiller reported its 10- and 20-City Composite Home Price Indexes declined a record 19.2% and 18.5%, respectively, in 2008. For the month of December, price declines were 2.3% and 2.5%, slightly worse than the -2.2% and -2.3% declines for both indices recorded in November. David Blitzer, chairman of the Index committee at S&P, said: "Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and eight of those MSAs now with negative rates exceeding 20%."

On the regulatory and legislative front, the judiciary and financial services committees jointly introduced H.R. 1106 The Helping Families Save Their Homes Act in the House. A vote on the bill by the full House is expected shortly. The bill includes a provision that would allow bankruptcy judges to cram-down mortgage loans on primary residences. The House Judiciary Committee passed the bill by a vote of 21-15, largely along party lines, in late January.

The cram-down provision included in this bill is more onerous than the one President Obama included in his Homeowner Affordability and Stability Plan. Obama's plan limited bankruptcy options to loans made in recent years and only if the homeowner runs out of options. A letter from the Mortgage Bankers Association (MBA) to House leaders stated: "It will encourage more homeowners to opt for bankruptcy and it will inject new risk into the mortgage market, thus making it more difficult for borrowers to buy, sell or refinance a home."

The Congressional Budget Office said in a report that over a million distressed homeowners could benefit from filing for bankruptcy, but they estimated that one-third of that amount would be influenced to file because of the change in the law. Reports out later in the week said that Senator Richard Durbin (D-IL) is considering a revision that would limit cram downs to existing subprime loans only. Such a move is seen as garnering better support from the various lobbying groups.

While Republicans and lobbyists have expressed opposition to the cram down provision, some moderate Democrats also began to question it when it came to the floor on Thursday.

As a result, the House has delayed a vote on the bill until possibly Tuesday as House Speaker Nancy Pelosi plans to meet with U.S. Deparment of Housing and Urban Development Secretary Shaun Donovan on Monday to further discuss the issue.

In terms of borrower activity, mortgage applications drop 15.1% as mortgage rates creep up. The MBA reported mortgage applications for both refinancings and purchases declined in the week ending February 20 as mortgage rate crept up slightly.

The Refinance Index dropped 19.1% to 3618, while the Purchase Index slipped 2.6% at 250.5. As a percent of total applications, refinancing share fell to 69.7% from 74.2%. ARM share was 1.9%, up from 1.7%.

Freddie Mac reported 30-year fixed mortgage rates averaged 5.07% versus 5.04% this week, while 15-year rates were unchanged at 4.68%.

On the adjustable-rate mortgage side, five-year hybrid ARMs rose two basis points to 5.06%, while one-year ARMs averaged 4.81%, one basis points higher from the previous report.

While mortgage rates were little changed, borrowers appear to be very sensitive to any increases as suggested by the MBA's report. In addition to expectations of lower mortgage rates in the future, borrowers were likely waiting for final clarification on the Stimulus Bill. 

This expected clarifications include an $8,000 tax credit for first time home buyers as well as details about the President's housing plan. With the Stimulus Bill signed into law, activity could begin picking up for purchase applications.

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