Mortgage spreads ground tighter last week in better-than-expected activity. Buyers were expected to hold near the sidelines on the wait for Friday's May employment report, but they turned out to be fairly active. Investor groups included money managers, hedge funds, insurance companies and even some overseas support. At the same time, originator selling held to around $1 billion per day on average.

Investors may have been more confident to add to positions ahead of the payrolls report. For one, prices are considered to be slightly cheap. Also, regardless of the report, mortgages are expected to continue their steady move tighter. One trader said there is plenty of cash available to invest, particularly from banks, and a backup in yields provides an attractive investment opportunity. On the other hand, if the report were weak, odds would be lower for a June rate hike, thus allowing more time for the carry trade.

Over the week, spreads were unchanged in 30-year Fannie Mae 4.5s, three basis points better in 5s, one basis point tighter in 5.5s and 6s, and two basis points firmer in 6.5s. Meanwhile, 15s moved in four to five basis points for 4% and 4.5% coupons, and were two to three basis points better for 5s and 5.5s.

Mortgage application activity down slightly

The Mortgage Bankers Association (MBA) reported that mortgage application activity declined 1% overall for the week ending May 28. The Purchase Index rose 2.2% to 460, while the Refinancing Index declined 6.6% to 1584. This was in line with analysts' expectations. As a percentage of total application activity, refinancings were 34.3% versus 36.2% in the previous survey. ARM applications also fell to 33.9% from 34.6%.

Fixed mortgage rates fall in latest Freddie survey

Fixed-rate mortgage rates dipped slightly last week, according to Freddie Mac's latest survey. The 30-year fixed-rate mortgage rate fell four basis points to 6.28% and 15-year fixed rates were down six basis points to 5.63%. Meanwhile, the one-year ARM rate rose 11 basis points to 3.98%.

Despite slightly lower mortgage rates, application activity is anticipated to be down further in this week's report. It was impacted, in part, by the Memorial Day holiday.

Rise in commercial loan originations

The MBA recently released its quarterly survey on commercial and multifamily originations. For the first quarter 2004, originations were up 2.8% from 1Q03 to $20.9 billion.

Multifamily properties represented the largest property type by origination volume -$7.1 billion - or 33.9% of total first quarter originations. Multifamily volume, however, was down nearly 13% from 1Q03. The second largest sector in terms of origination was office properties at 25.5%, or $5.3 billion. Office origination volume is up nearly 29% compared to the same quarter a year ago. Retail properties rounded out the top three sectors at 22.0%, or $4.6 billion for the quarter. Retail volume gained 31.4% from a year ago.

Conduits purchased the largest share of origination loan volume at 34%, or $7.1 billion. This is up 6.7% from the first quarter of 2003. The second largest group was life insurance companies at $3.9 billion, or 18.7%. Origination volume by this investor group is 7% higher versus a year ago. Commercial banks represent the third largest at $3.7 billion, or 17.5%. This is up 23% from the first quarter of 2003. Originations from Fannie Mae and Freddie Mac, meanwhile, decreased from a year ago. Fannie Mae's 1Q04 loan purchases totaled $1.9 billion compared with $2.5 billion for the similar quarter last year. Freddie Mac's volume was $629 million for the first quarter versus $752 million in 2003.

Looking ahead for the remainder of the year, the MBA's chief economist, Doug Duncan, expects origination volumes to hold steady despite increasing interest rates, due to an improving economy.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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