The dominant theme in last week's MBS market was rolls, with the settlement for 30-year conventional MBS and the limited supply pushing 30-year Fannie Mae 5.5s and 6s through fail levels. January rolls are already on fire and expected to remain special for 30-year FNMA 5.5s.
Analysts at JPMorgan Securities estimate the float in 5.5s is around $44 billion, net of CMOs, and predict at least another $30 billion will be added in January, of which one-third will be taken out by CMOs. In addition, JPMorgan expects strong demand from indexers as 5.5s increase, as well as strong demand from buyers reinvesting heavy paydowns. So there's a good chance, the firm said, that the FNMA 5.5 roll will again be at or near fail in January.
The supply outlook in fact suggests the technical situation for mortgages is going to continue for some time. Recently, both Office of Federal Housing Enterprise Oversight (OFHEO) and Freddie Mac released reports on slowing home price growth. This implies lower supply for 2003. In fact, OFHEO and Freddie project net growth of under $120 billion next year.
Over the Wednesday-to-Wednesday period, spreads were mixed. 30-year Fannie Mae 5.5s widened five basis points while 6s tightened by a similar amount; and in dwarfs, 5s were eight basis points weaker while 5.5s were one basis point firmer.
November prepayments better than expected
Street consensus was for percentage gains in unseasoned conventional 6s and 6.5s of 21% and 10%, and for increases of 5% or less in older vintages and higher coupons. In fact, speed increases for unseasoned Fannie currents were just 17% in 6s to 17% CPR, and 7% in 6.5s to 39% CPR. Most other vintages and coupons slowed about 5% on average from October.
Ginnie Maes also came in slower than expected. For example, 2002 and 2001 6s gained 10% and 7%, respectively, to 9% CPR and 21% CPR. Consensus was calling for increases of 29% and 25% to 12% and 24% CPR. Meanwhile, 2002 6.5s prepaid at 33% CPR, a 5% gain, while 2001 vintages were unchanged at 48% CPR. Expectations were for speeds to increase to 36% CPR and 51% CPR, respectively.
A contributing factor to the slowing and decline was the lower day count in November versus October by three days. According to Salomon Smith Barney analysts, those three fewer days probably resulted in increased pipeline fallout. This may have been a stronger impact than usual, they say, as there was a sharp decline in rates toward the end of October and into November. Many borrowers who applied for new mortgages before mid-October probably reapplied to get even lower rates, which means that those loans were not able to close in November.
Have speeds peaked?
Analysts are a bit divided on whether or not we've seen the speeds peak. According to researchers at Lehman Brothers, prepayments should dip slightly in December as the day count is similar to November's, while January will report an increase as a result of a longer day count. Bear Stearns analysts suggest that a peak was reached in the 2002 refi event, and they expect speeds should begin to trend lower in the December report.
Researchers from JPMorgan, Credit Suisse First Boston and UBS Warburg, on the other hand, expect December's report to show some increases. Those from JPMorgan believe the upcoming report will mark the peak in prepayments, unless there is a significant rally. The firm projects December 2001 Fannie Mae 6s will prepay at 45% CPR versus 39% in November; 2001 6.5s at 64% CPR versus 60%; and 2001 7s at 68% CPR compared to 59% last month.
UBS Warburg analysts are forecasting increases of 15% to 20% in 2002 and 2001 6s; and about 10% to15% in unseasoned 6.5s and 7s. Higher coupons are expected to rise 5%. The reason they believe speeds will increase is that November's report was impacted by the October pipeline fall-out. Looking ahead to January, they expect modest slowing, with further slowing in February.
Refi Index drops below 4000
The Mortgage Bankers Association (MBA) reported further declines in mortgage applications for the week ending Dec. 6. Analysts had generally expected modest gains following the Thanksgiving slowdown in the previous week. On a seasonally adjusted basis, the Refi Index fell 9% to 3794 and Purchases were off 7% to 359. On an unadjusted basis, however, both the Refi and Purchase indexes rose significantly. The Refi Index jumped 31% and Purchases gained 27%. In comments regarding the report, Lehman attributes part of the decline in the Refi Index to the reduction in the premium coupon universe due to paydowns and to burnout.
Refinancing activity represented 70% of total applications compared to 69.5% the previous week, and the share of ARM activity increased to 14.4% from 14.0%.
Mortgage rates dipped as expected in Freddie Mac's Primary Mortgage Market Survey. The 30-year fixed mortgage rate declined 15 basis points to 6.04%; 15-year fixed mortgage rates fell 14 basis points to 5.46%; and the one-year ARM rate reported at 4.18% compared to 4.21% last week. The decline is expected to stimulate borrower activity. UBS Warburg analysts say the Refi Index should rise in the next couple of weeks to around 5000 if rates remain unchanged.