Countrywide Securities analysts have highlighted their recent production activity and applications trends in light of the decline in interest rates and shifts in the yield curve.
Not surprisingly, since about April, there's been a steady increase in fixed rate loan production from just over 40% of total loan production to between 50% and 60% through October. Over this same period, there's been a steady decline in pay-option and short-reset ARMs from the 20% area to the 10% area. Other programs such as hybrid ARMs, subprime ARMs, subprime fixed, and government fixed have held in a narrow range. The table on this page gives the proportion of their total production in various loans in October compared to June of this year.
A review of destination loans for refinancings out of ARMs shows a steady increase into 30-year fixed rate loans since the spring. Refinancings into hybrids have also picked up in the last couple of months after holding steady over the summer. Meanwhile, refinancings out of adjustable loans back into pay-option and short-reset ARMs have declined steadily from early spring.
A review of destination loans from fixed refinancings also shows a steady increase into fixed rate. However, refinancings into hybrids from this group has steadily declined in the last three months, as has refinancings into pay-options and short reset ARMs.
Application trends have recently shifted higher on the improved mortgage rate levels. Contributing to this has been the flattening of the curve. Analysts said that has increased the amount of ARM-to-fixed refinancings as the flatter curve has had an impact on both hybrid and pay-option ARM rates. There's also been an increase in fixed-to-fixed refinancings.
Market conditions
Countrywide's research pointed out that in addition to the recent bond market rally, consumer mortgage rates are low relative to rates in the Treasury market. Contributing to this has been the strong performance of the mortgage sector this year. In addition, the relatively low level of consumer mortgage rates has led to increased competition on mortgage pricing.
The fixed rate sector has also seen increased refinanceability given that over the last year, the fixed conventional mortgage rates have been over 6.25% for an extended period of time. "This has resulted in a surprisingly large amount of outstanding loans with relatively high note rates," observed analysts. In particular, they noted the face value of 30-year agency conventional fixed rate loans with WACs between 6.5% and 7% has increased from $238 billion at the beginning of 2005 to $341 billion in October of 2006.
Analysts added that many of these loans are fairly generic in nature versus consisting of impaired "alty" loans, and so are likely to be more responsive to refinancing incentives.
Within the fixed rate sector, the proportion of IO loans in the fixed rate jumbo sector has increased to over 35% in recent months from 10% in March 2005.
The proportion of IOs in the conforming area is much smaller at under 15%, but is up from less than 5% in March 2005. Analysts said that many borrowers turning to fixed-rate IOs are refinancing out of lower-rate loans. This suggested to analysts that borrowers are increasingly driven by monthly cash flow considerations.
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