The big day last week was Wednesday. Not only was it the day of the Federal Open Market Committee statement, but the Financial Accounting Standards Board also met to discuss issues related to FAS 155 on the same day. In fact, in many mortgage participants' minds, it was the FASB meeting that was the highlight of the week.
The meeting was favorable for a large part of the mortgage market as the proposal would exempt sectors like discount passthroughs and REMIC tranches such as PACs, sequentials, support and companion bonds from the "double-double" test included in FAS 133 (see story on p.1). The news did stimulate some buying interest from the fast money camp.
Mortgage activity picked up throughout the day Wednesday heading into the FOMC statement and modestly afterwards. Overall, after quiet flows on Monday and Tuesday on the lack of data and the FOMC wait, Wednesday saw a return to average activity amidst two-way flows. Real and fast money participated, as did overseas buyers, with interest focused more in current and premium coupons. In early trading on Thursday, mortgages were seeing active buying from fast money and Asian investors as the market moved higher on the weak core durable goods number. For the week, originator selling remained uneventful, holding near its average of $1 billion per day.
Mortgages' performance held steady over the week. Month to date through Oct. 25, Lehman Brothers' MBS has outperformed Treasurys by 24 basis points. Year-to-date, the index remains where it was at the end of February - at +85 basis points.
Analyst sentiment is mostly neutral to positive currently given the stable Federal Reserve outlook, range bound market, and low volatility. Also, the FAS 155 news is seen as favorable for mortgages, and despite Bank of America's decision to reduce their MBS holdings, other banks are still expected to continue to invest in mortgages. The outlook for overseas investment, and particularly, Asian support remain favorable for the sector - especially with the increasing trade deficit. JPMorgan Securities analysts noted that, with approximately $22 billion in net purchases made in August, foreign purchases of mortgages are on track to exceed $150 billion for this year. Alec Crawford, head of agency MBS strategy at RBS Greenwich Capital, also expects to see good Asian investor support. On a recent visit to that part of the world, he said these investors indicated a preference to add MBS and other structured products versus Treasurys or corporates. In general, mortgages are seen as remaining directional - lagging in rallies and tightening in sell-offs.
This week, there are a number of economic releases scheduled as well as month-end. The key economic releases include third quarter ECI, Chicago PMI, ISM Index, third quarter Productivity & Costs, and, of course, the employment report. Also, the Treasury will be making its Refunding Announcement on Wednesday. The MBS Index month-end extensions are rather modest - just 0.04-years, Lehman projected. This is substantially below the average October extension of 0.11-years. The other major segments extensions are also rather light: 0.02-years for the Treasury Index; 0.09-years for the Agency Index; 0.05-years for Credit; and 0.04-years for the Aggregate.
Deutsche on '07 limits
The Office of Federal Housing Enterprise Oversight determines the official limit based on the October-to-October prices changes in the average home price as published by the Federal Housing Finance Board. At this time, FHFB data is current through August. Using the existing data, along with National Association of Realtors existing and new home sales information, the Census Bureau's new home sales, housing starts, National Association of Home Builders Index, and 10-year's of historical FHFB home price movement from August to October (which implies an average change of -0.2%), Deutsche Bank believes there is a good chance that after six-years of strong gains, the 2007 single-family conforming loan limit will hold unchanged at $417,000.
Deutsche analysts highlight several implications for an unchanged limit - and they fall more to the positive side for the market. One is that the limit, to some extent, dampens the migration of jumbos to conforming loans - which is a positive for both convexity and supply of conventionals. The second one is that higher loan sizes implies poorer convexity on a mortgage, so no change in loan size is positive for that aspect. The final point analysts make is that current Ginnie Mae legislation before Congress would increase the Federal Housing Administration loan limits to nearer conventional limits, which should help make Ginnie Mae more competitive against the GSEs and take a greater share of supply.
Typically, OFHEO releases its report on the conforming loan limits for the upcoming year in late November.
Refinance activity up slightly
The Mortgage Bankers Association reported last Wednesday that overall mortgage application activity was up slightly for the week ending Oct. 20. The Refinance Index rose 1.8% to 1790.4 as mortgage rates held little during the survey period after increasing several basis points during the week before. Meanwhile, the Purchase Index fell less than one percent to 382.4, from 384.7.
As expected, mortgage rates increased a few basis points last week in response to the slight backup in the market earlier in the week. According to Freddie Mac, the 30-year fixed mortgage rate rose to 6.40% from 6.36%. This is back to levels seen in mid-September. For the month of October, the 30-year fixed rate averaged 6.36% compared to 6.40% in September and 6.52% in August.
Meanwhile,15-year fixed mortgage rates also rose four basis points to 6.10%. On the adjustable side, both 5/1 hybrid ARMs and one-year ARMs rates rose three basis points to 6.14% and 5.60%, respectively.
Looking ahead to this week's MBA mortgage application survey, expectations are for refinancings to decline slightly.
Speeds in October are expected to increase around 10% to 12%, aided by an extra collection day and increased refinancing activity as a result of a more favorable mortgage rate environment in September. The October reports will be out the evening of Monday, Nov. 6.
Looking to November, speeds are currently projected to be slightly lower with discount coupons declining around 5%, while par and premiums should be flat. For December, stronger slowing of about 8% is expected.
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