Last week was fairly choppy for mortgages, with the first half of the week seeing fast money profit taking and above average originator selling. Mortgage cheapening finally encouraged some real money support - albeit modest - by Thursday and spreads had recovered some of their earlier week widening.
The near-term outlook for mortgages remains somewhat pessimistic. Rolls are not attractive, supply is strong, overseas buyers are showing limited support at current yield levels, real money is no longer underweight and liquidity tends to decline in the latter part of August, as many participants are on vacation. Weakening is likely to draw in some opportunistic buying, but that is expected to be limited. JPMorgan Securities analysts favor an underweight to mortgages as fundamentals and short-term technicals are poor. They also prefer selling 5.5s versus 5s as month-end support should favor 5s on a market share increase.
Application activity increases modestly
Mortgage application activity increased 2% overall for the week ending Aug. 12, primarily on an uptick in refinancing activity that responded to the late week rally. The Refinancing Index rose 5% to 2286, according to the Mortgage Bankers Association. Meanwhile, purchase activity was essentially unchanged at 499.3 versus 498.8 the previous week. As a percentage of total application activity, refinancings were lower at 40.9% from 41.7% previously. ARM share increased to 29.7% from 28.5%.
Michael Cevarr, MBA's director of member surveys, noted that the overall number of applications is 10.6 % greater than the same time last year with the dollar volume of applications also increasing 26.1%. This rise is true for both purchase and refinance applications, reflecting the increasing home values over the past year, Cervarr added.
The Refinancing Index has been holding firm despite the increase in mortgage rates. To some extent, analysts attribute this phenomenon to fence sitters reacting to the higher rate levels. In recent research, UBS analysts noted that previously, for similar rate levels, application volume moved higher when rates increased compared to when they declined. Lehman Brothers analysts also suggest that homeowners are cashing out equity in order to pay upcoming tuition payments for their children.
Mortgage rates respond to rally
After six weeks of increases, mortgage rates declined slightly last week in response to the latest rally that brought the 10-year Treasury yield down from 4.49% on Aug. 10 to 4.21% as of Tuesday's close.
For last week, Freddie Mac reported the 30-year fixed rate mortgage fell nine basis points to 5.80% -in line with expectations. The 15-year fixed rate averaged 5.40% versus 5.47% the previous week; the 5/1 hybrid ARM rate was six basis points lower to 5.34%; and one-year ARM rates reported in at 4.58% versus 4.57% previously.
Explaining what happened to mortgage rates over the week, Freddie's Chief Economist Frank Nothaft said, "Mortgage rates can fluctuate from week to week depending on market conditions and expectations." He added that despite recent economic indicators being positive, they were still not up to market expectations.
However, Nothaft said long-term mortgage rates are at about the same levels they were at this time last year. This is why it isn't surprising, he said, that the housing industry continues to thrive, noting robust home sales and increased housing starts compared to last year's numbers. Given last week's decline in mortgage rates, refinancing activity is anticipated to hold near its current level.
Currently, expectations are for August prepayments to increase roughly 10%, primarily due to a higher day count, then decline 15% to 20% in September on the decline in refinancings and lower day count. An additional 5% to 10% slowdown in October is currently projected.
JPMorgan analysts said that although the MBA Refinancing Index suggests a less than 5% decrease in August, this is offset by the three additional collection days for the month and a 5% increase in seasonal turnover. But analysts expect a sharp slowdown in discount speeds for September, equivalent to 20%.
(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.