As September trading got underway following a long weekend, mortgages got off to a shaky start. Volume started off light, but picked up quickly as Treasurys turned around at mid-morning.
Flows were directed toward better selling as Treasurys sold off and then even as they recovered following strong performance gains made in the last two weeks of August. The widening did interest money managers, hedge funds, and servicers - primarily in 5.5s and 6s. Still, sellers reportedly outnumbered buyers by 3:1. Supply averaged $2 billion, mostly in 6% coupons, which was a factor in Tuesday's weakness given the lack of buyers. Spreads ended wider to the curve by seven and six ticks in 5s and 5.5s, and by five and four ticks in 6s and 6.5s. Versus swaps, spreads ranged from four ticks wider in 5s to two ticks weaker in 6.5s.
The tone was more supportive on Wednesday as investors took advantage of Tuesday's cheapening that carried over into Wednesday morning. Spreads opened two ticks wider to the curve and by mid-day were one to two ticks tighter. Discount coupons were leading - helped by some flattening in the yield curve. In addition, supply was minimal.
In other mortgage related activity, 15s were in line to lagging 30s, GNMA/FNMAs were mixed, and specified pools were pressured by money manager selling and dealers trying to reduce positions before quarter end. Asian investors were quiet after showing a bit more activity at the end of August.
While valuations remain attractive, the recent higher prices are pushing out bank and overseas investor support. In addition, the Treasury indecision regarding the GSEs is keeping MBS buyers cautious with quick turnaround on purchases to protect profits.The up-in-coupon trade was favored, which was more enhanced by the prospect of even further slowing in speeds with the advent of the fall and winter.
By mid-August, mortgages were lagging Treasurys by nearly 100 basis points. However, they rallied sharply in the final two weeks of August partly buoyed by the prospect of nationalization.
The MBS Index outperformed Treasurys by 24 basis points and by 19 basis points versus swaps, according to Lehman Brothers. At the same time, cross sectors underperformed Treasurys for the month by significant amounts: ABS negative 200 basis points, CMBS negative 245 basis points, and corporate negative 72 basis points.
Mortgage Applications Rise
Mortgage application activity was higher for the second week in a row in response to further declines in mortgage rates. The Mortgage Bankers Association (MBA) reported that the Refinance Index rose 2.1% to 1059.7, while the Purchase Index jumped 10.5% to 349.0 for the week ending Aug. 29. Specifically, the MBA noted that the Conventional Purchase Index was up 6.1%, while the Government Purchase Index surged 19.9%.
The 30-year fixed contract rate fell five basis points to 6.39% and one-year ARM rates slipped four basis points to 7.11%. Since the week ending Aug. 8, the 30-year contract rate has dropped 18 basis points.
As a percent of total applications, refinancing share was 34% compared to 35.2% in the previous report. ARM share fell to 6.6% from 7.9%.
August speeds are currently expected to slow 10% from July. The largest percentage declines are in 6% coupons and higher. Contributing to this is one less collection day in August, along with higher mortgage rates and lower refinancing activity. For the month of July, the Refinance Index averaged 1289, down 6% from June's average of 1371, while the 30-year fixed mortgage rate, as reported by Freddie Mac, averaged 6.43% compared to 6.32%. For the August report, which was scheduled for beginning last Friday evening, paydowns were estimated in the mid-$30 billion area.
The current outlook has speeds lower by 7% to 8% in September. Contributing to the decline is the lower refinancing activity in August as well as higher mortgage rates. The Refinance Index averaged 1052, down 18% from July's average. At the same time, the 30-year fixed mortgage rate averaged 6.48%, off five basis points from July's average. Day count holds steady in September at 21 days.
For October, speeds are expected to increase 1% to 2% in response to an increase in the number of collection days to 22 from 21.
Freddie Mac Reports Mortgage Rate Declines
Freddie Mac reported declines in both fixed and adjustable mortgage rates this week.
Chief Economist Frank Nothaft attributed the easing to recent economic data, "that suggest consumer spending may slow," noting particularly the decline in personal income - 0.7% in July, the first decline since August 2005.
Specifically, 30-year fixed mortgage rates averaged 6.35% compared with 6.40% the previous week. Since peaking at 6.63% on July 24, mortgage rates have tumbled 28 basis points. In the other loan programs, 15-year fixed rates slipped three basis points to 5.90%, 5/1 Hybrid ARMs were down six basis points to 5.97%, while one-year ARMs dropped 18 basis points to 5.15%.
Continued mortgage rate improvements could allow for some pick up in application activity. However, tightening in loan underwriting, low consumer confidence, potential declines in home prices, higher charges from the GSEs, and slowing seasonals may work against them.
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