May was a bust for mortgages. According to Lehman Brothers, the MBS Index recorded excess return versus Treasurys of negative 23 basis points for the month. As June starts, it looks like it will continue to be a difficult environment for mortgages as volatility is expected to remain elevated with the Federal Open Market Committee's focus on economic data in order to determine when and if they can pause.

Other factors are also not supportive for mortgages. These include the ongoing lack of Asian participation and high dealer inventories. Domestic banks and money managers have also limited their participation given the risks. These issues are not anticipated to change much until there is clarity regarding Federal Reserve action. Additionally, there are concerns regarding extension risk associated with the slowing housing market.

Mortgage market flows last week were limited, but two-way as the market waited for the FOMC minutes and the employment report. There was some expectation of support from month-end buying on Wednesday; however, it never really emerged. Originator selling picked up slightly and was average to slightly above average.

Refis slip while purchases hold steady

Mortgage application activity declined 2% overall for the week ending May 26, according to the Mortgage Bankers Association. The Purchase Index was little changed at 395.5 versus 396.4 in the previous report. The Refinance Index declined 4.8% to 1409, which is the lowest it's been since the end of last year. In addition to higher rates, some of the slowing was likely due to the approaching Memorial Day holiday.

As a percentage of total application activity by dollar volume, ARM share was 45.2% versus 44.3% in the previous report. Refinancings were down slightly to 37.1% from 37.5%.

The near-term outlook is for refinancing activity to remain generally range bound in the near term as mortgage rates hold in a narrow range.

Mortgage rates continued their steady trend higher, according to Freddie Mac's latest survey as the market reacted to the potential for additional Fed rate hikes. For the week ending June 2, the 30-year fixed rate averaged 6.67%, up five basis points from the previous week, and up 105 basis points from a year ago. This is the highest rates have been since June 2002, when it was 6.71%.

For the month of May, the 30-year rate averaged 6.61%, up from 6.51% in April, and will be felt in the June prepayment report that will be released in July. Day count should be less of a factor as it is unchanged from May's 22 days. In January, 30-year mortgage rates averaged 6.15%.

Other loan programs also saw higher rates. For example, 15-year fixed rates rose to 6.26% from 6.23%; 5/1 hybrid ARMs averaged 6.26% versus 6.21% previously; and one-year ARM rates rose seven basis points to 5.68%.

Fannie Mae sees growth in April mortgage portfolio

Fannie Mae reported its gross mortgage portfolio was up $8.9 billion in April from March, for an annualized growth rate of 15.7%. This comes on purchases of $23 billion, offset by $2.4 billion in portfolio sales and liquidations of $11.9 billion. Year-to-date, the growth rate is 1.2% versus 10.1% for Freddie.

As of the end of April, the portfolio totaled $730.4 billion, which is above December's level of $727. 5 billion. In a settlement with OFHEO, Fannie Mae agreed not to increase its mortgage portfolio above the year-end amount. The GSE explained that what is reported in its monthly summary represents "statistical measures" and not amounts computed in "accordance with GAAP." The GSE said that mortgage portfolio assets reported to OFHEO would reflect GAAP adjustments such as mark-to-market adjustments for AFS securities, allowance for loan losses, and unamortized premiums and discounts.

Freddie Mac reported earlier in May the ending balance of its retained portfolio was $723.8 billion. In recent months, the two GSEs' portfolios have been converging. The difference in April - $6.6 billion - is similar to March's $5.7 billion, and down from $15.5 billion in February.

The summary showed net retained commitments in April were similar to March at $17.4 billion versus $16.6 billion. This is up sharply from the $9 to $10 billion level in the first two months of the year.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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