Last week in the mortgage market, supply continued to ramp up — averaging $4.4 billion per day on average compared with $3.4 billion the previous week.

Additionally, 4%s made up about 60% of the supply with 4.5%s at 40%. The increase was readily absorbed by the Federal Reserve, which bought on average $6.6 billion per day based on its latest weekly report, and mainly in the supply coupons.

Meanwhile, real money, money managers and leveraged accounts were two-way and moving primarily up in coupon. Indexers made their month end appearance on Tuesday, while overseas remained a steady buyer — mostly in GNMAs.

Overall, MBS volume was above normal at 120% through Thursday. In other mortgage related activity, 15s outperformed 30s, conventional dollar rolls were little changed, and GNMAs/FNMAs were mixed.

Specifieds were active with bid lists early in the week as quarter end wound down, while originator bid lists hit in the latter part of the week ahead of Class A. The heavy amount of bid lists began to pressure pay-ups by week's end. Demand was strong as investors sought call-protected paper.

The Fed's gross purchases of MBS for the period March 26 through April 1 totaled $68.5 billion, with net purchases amounting to $32.9 billion. This results in a daily average purchase of $6.58 billion. Net purchases were similar to the last report at $33.2 billion and $6.63 billion per day average.

Net purchases of 43.6% were in FHLMC Golds, 51.5% in FNMAs, 4.9% in GNMAs, and 98.8% in 30-year MBS. Almost all of the net purchases were in 4.0% coupons at 55% and 4.5s at 42% with settlements for April and May, and to a lesser extent June.

Relevant Mortgage News

The  Financial Accounting Standards Board eased mark-to-market accounting rules that will allow banks to mark securities to model rather than market. The change is effective for the second quarter, but will be permitted for 1Q09 results. Several of the major financial institutions will be reporting quarterly results around mid-April.

The National Association of Realtor's Pending Home Sales Index (PHSI) for February rose 2.1% to 82.1, in line with expectations. Compared with a year ago, however, the index is 1.4% lower. The PHSI in the Northeast, Midwest and South all rose, while it was lower in the West in February.

S&P/Case-Shiller HPI for January set new record annual declines of 19.4% for the 10-City Composite and 19.0% for the 20-City Composite. For the month of January, home prices were down 2.5% and 2.8%, respectively, compared to negative 2.3% and negative 2.6% in December.

According to the press release, prices are back to late 2003 levels. It also said from the peak in Q2 2006 home prices have fallen 30.2% on the 10-City and 29.1% on the 20-City.

"There are very few bright spots that one can see in the data. Most of the nation appears to remain on a downward path," David M. Blitzer, chairman of the index committee at S&P stated. 

Prepayment Outlook

Despite record low mortgage rates, mortgage applications increased just 3% overall in the week ending March 27. According to the Mortgage Bankers Association (MBA), the Refinance Index rose 3.7% to 6600.1. For the weeks ending March 13 and 20, the Refinance Index surged a respective 30% and 42%.

Meanwhile, the Purchase Index remained virtually the same at 268.0 versus 267.8 in the previous report. As a percentage of total applications, refinancing share was 79.1% compared to 78.5% previously. ARM share increased slightly to 1.5% from 1.4%.

Freddie Mac reported 30-year fixed mortgage rates fell seven basis points to 4.78% this week - its lowest level since the start of the survey in 1971.

Meanwhile, 15-year fixed rates averaged 4.52% compared to 4.58% last week; five-year hybrid ARMs slipped four basis points to 4.92%; and one-year ARM rates declined 10 basis points to 4.75%. With further improvement in mortgage rates, mortgage applications are expected to remain elevated.

Fannie Mae and Ginnie Mae March prepayment speeds are projected to decline around 10% and 7% on average, respectively, from February with paydowns estimated at around $94 billion.

Factors influencing  these speeds include a decline in refinancing activity in February as borrowers waited for lower mortgage rates as well as the wait for the President's Housing Plan, and a higher day count.

The MBA's Refinance Index averaged 3469 in February compared to 5297 in January, while the number of collection days increases to 22 from 19.


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