Mortgages saw sizeable volumes last week as the market rallied, flows were two-way and buying was better overall. Servicers remained active, but were now selling 6s to move down in coupon. Originator selling also picked up in the early part of the week, averaging around $1.5 billion per day, mostly in 6% coupons. Towards the week's end, selling had slowed and was concentrated more in 5.5s.
Last week, RBS Greenwich Capital MBS analysts noted an improved tone in mortgages with the 10-year Treasury back towards the middle of its two-month range - 4.30% to 4.67%. As a result, RBS Greenwich analysts believe the sector's risk profile has shifted back towards neutral. However, they expect that, with the market having traded around current yield levels for a while, investors' appetites are probably satisfied for now.
The lack of investor demand remains an issue for the mortgage market. For example, Lehman Brothers analysts continue to recommend an underweight to the sector as current spreads do not offer sufficient compensation for the risks, including the lack of a strong demand base. At the same time, demand is muted, while fixed-rate supply is increasing.
Kevin Jackson, vice president at RBC Financial Group, said last week that after not growing for over a year, agency fixed-rate MBS outstanding has increased for seven consecutive months, noting that in 2003, much of the fixed-rate growth was in 15- and 20-year MBS. By contrast, the recent rise has been in 30-years. "This supply shift combined with low bank demand and a sharp drop in Asian demand has pushed OASs up sharply," Jackson said.
For the near term, however, a stable market suggests the fairly supportive tone in mortgages should continue. A sell-off particularly above 4.70% on the 10-year Treasury brings extension risks and servicer selling back to the forefront.
The Mortgage Bankers Association reported that overall mortgage application activity was down less than 1% last week. The Refinance Index fell 5% to 1702 in response to higher rates, while the Purchase Index rose nearly 3% to 478. The numbers were adjusted for the Veterans Day holiday. Unadjusted, the Refinance Index dropped 15%.
As a percentage of total application activity, refinancings slipped to 40.4% from 41.7% in the previous report. ARM share, meanwhile, rose to 32.9% from 31.6%. By dollar volume, ARM share rose to 48% from 47.4% previously. The highest ARM share this year has been 52% for the week ending March 25.
With higher mortgage rates as well as some potential slowing associated with holidays, mortgage application activity is expected to continue on its downward trend. JPMorgan Securities analysts expect this week's Refinance Index to drop roughly 3% to 1650.
Fixed mortgage rates
Mortgage rates held within a narrow range last week as a result of the rally. According to Freddie Mac's weekly primary mortgage market survey, the 30-year fixed mortgage rate averaged 6.37% compared to 6.36% the previous week. Meanwhile, 15-year fixed mortgage rates also rose one basis point to 5.90%. On the adjustable side, 5/1 hybrid rates were reported at 5.86% compared to 5.81% previously, and the one-year ARM rate increased eight basis points
Commenting on the report, Freddie Mac Chief Economist Frank Nothaft said that with the further yield curve flattening over the week, the spread between the 30-year fixed-rate mortgage and the one-year ARM rate is now at its narrowest point since November 2001, making the one-year ARM product much less attractive to borrowers. Nothaft attributed this phenomenon to recently released inflation indicators - such as the Consumer Price Index and the Producer Price Index - bringing down long-term bond yields and flattening the yield curve.
"Nevertheless, it's good to keep in mind that current mortgage rates, overall, are still below the 1990s average of around 8% for a 30-year fixed-rate mortgage and 6% for the one-year ARM," Nothaft said.
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