Countrywide Securities' lending volumes have remained strong despite the composition of its production changing profoundly, according to a regular update on the mortgage originator's production and application trends released recently.

Overall issuance activity remained within the range it has been in the past year, Countrywide analysts said. The production composition continued to favor fixed-rate products. About 65% of Countrywide's total loan production was in fixed rate as of April. This compares to just over 40% a year ago and 50% as of September 2006. Hybrid ARMs made up the second largest category at just under 20%. While hybrid ARMs dipped in April, it had been steadily rising since about November of last year.

MTA pay-option and short-reset ARMs have dropped to roughly 5% from approximately 20% in late 2004 through around May 2006. Analysts said that the plunge in this product might reflect the hybrid pay-option's growing appeal. However, they also said that the decline in ARM share since December also coincided with the accrual rate on many MTA-based loans breaching the 8% level. Analysts added that they don't expect MTA pay-option ARM production to rebound anytime soon. Even in the event of a Federal Reserve rate cut, the effect would not be felt for several months because of the lagged nature of the index. For now, analysts believe that overall ARM share will be linked more closely to the relative rates of hybrid ARMs and fixed-rate products.

The report also looked at transition data. In terms of refinancings out of adjustable rate loans, just over 60% of the borrowers opted for a 30-year fixed-rate loan. When it comes to refinancings out of fixed-rate loans, 75% took out 30-year fixed-rate loans, analysts said. They also looked at the original product type for the refinancings into fixed-rate loans. The Countrywide report said that 56% were prime fixed rate; 16% were subprime ARMs; 12% were MTA pay-option and short-reset ARMs; 11% were prime hybrid ARMs; and 6% were subprime fixed.

The trend toward increased fixed rate production will, over time, impact the performance profile of the MBS sector and the fixed income markets, analysts said. The rise in ARM production has led to the tight spreads and low realized and implied volatility the MBS market has experienced in recent years. "Depending on which types of accounts ultimately hold the new fixed-rate production, continued growth in the share of fixed-rate loans may result in wider spreads and higher levels of both realized and implied vol," Countrywide analysts said.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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