Mortgage rates continued their downward trend with the 30-year fixed mortgage rate declining 7bps to 4.87% with an average 0.7 point for the week ending October 8, according to Freddie Mac"s weekly survey. Rates are at their lowest level since mid-May and are just nine basis points above the record low of 4.78% hit in early April and again in early May.

With current mortgage rates holding below 5% and the no point rate at just over 5%, refinancing activity is likely to stay stimulated and move towards 4000. For the week ending October 2, the Mortgage Bankers Association (MBA) reported the Refi Index jumped 18% to about 3379.

Freddie Mac also reported 15-year fixed mortgage rates averaged 4.33%, down 3bps from last week, and setting a new record low. 5/1 hybrid ARM rates were also lower to 4.35% from 4.42%, while one-year ARM rates rose four basis points to 4.53%. With mortgages holding below 5%, speeds are expected to move higher in upcoming reports. The increase, however says UBS, is expected to be "gradual" and "modest".

Currently the no point rate remains above 5% at 5.05%, but if it should fall below 5%, they think it would trigger heavy refinancing into the conventional 30-year 5%. In comments from Credit Suisse, analysts said if the lower mortgage rates can be sustained, "this would result in an incremental 15- 20% increase in prepayments in November (December factors)".

Prior to the latest prepayment report, speeds were revised higher for October and November in response to current mortgage rate levels. Speeds are predicted to increase around 10% in October and close to 5% in November with the largest percentage increases in 5% and 5.5% coupons, and within the higher coupons in 2008-2006 vintages related to HAMP modifications. Revised outlooks will be forthcoming over the next week.

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