Mortgage backed securities (MBS) prices are slightly higher (rates lower) after yesterday's mild sell-off due to disappointment over the size of the Fed's latest round of bond purchases and amid speculation the stress tests of the largest U.S. banks will show additional loan losses.

The stress tests are being used to determine whether companies have enough capital to cover losses over the next two years should the recession worsen. Regional banks are warning that a turnaround from the economic malaise is nowhere in sight, forcing major institutions to put more money aside to fortify against rising defaults.

Data indicates of the $557 billion in outstanding sub-prime mortgage debt, 45% is classified as "non-performing" and of the $745 billion in remaining Alt-A debt, 31% is deliquient. Weakness in the stock market has helped the MBS market today.

Despite very low mortgage rates and falling home prices, purchase applications fell 4.2% last week, according to the Mortgage Bankers Association's weekly survey. In contrast, refinancing remains strong with application volume up 7.7%.

The ongoing refinance boom will keep homeowners in their homes and limit supply on the market. The purchase data indicates continued tough conditions on the sale side.