Mortgages saw strong buying from insurance companies, money managers, hedge funds and banks last week as the Treasury market sold off. In addition, overseas accounts were active in Ginnies Maes. Preference was for up in coupon paper; however, lower coupons were bought as well.

Throughout last week, spreads were unchanged in 30-year Fannie Maes with the exception of 6s, which were one basis point tighter. Meanwhile, 15s were one basis point tighter, and also benefited from concerns of an uptick in volatility and the presidential election.

Mortgages are expected to remain directional for the time being, lacking any catalyst to move the market into a new range. Analysts are mostly neutral to slightly positive on the sector. On one hand, the sector is on the rich side, but carry and technicals remain favorable. Market participants hold high levels of cash positions, while originator selling has held at about $1 billion per day on average in 5s and 5.5s. Unless the market rallies substantially - 25 basis points says JPMorgan Securities - supply will remain light.

Freddie reports third-quarter jump in cash out refis

Freddie Mac reported last week that during the third quarter, 60% of Freddie Mac-owned loans were refinanced into new mortgage balances that were at least 5% larger than the original mortgages. This compares to 42% in the second quarter. Mortgage rates began to increase in the latter part of the second quarter with the 30-year fixed mortgage rate rising to over 6%, before declining back below at the beginning of the third quarter.

Freddie Mac's report also noted the median ratio of old-to-new rate was 1.14. This means that half of those borrowers who refinanced into a new loan got a rate 14% lower than the initial mortgage rate. Freddie Mac Deputy Chief Economist Amy Crews Cutts also noted that, "In the third quarter of 2004, homeowners who refinanced their mortgages lowered their rate on average 0.68 percentage points." For a $150,000 loan, that translates into annual savings of over $800.

The report also revealed that refinanced properties experienced a median home price appreciation of 17% over the period since the original loan was made. This compares to 7% in the second quarter. For loans refinanced in the third quarter, the median age of the original loan was 2.6 years versus 2.0 years in the second quarter.

Purchase activity jumps as rates dip

Mortgage application activity rose for the week ending Oct. 29, as 30-year mortgage rates fell to 5.64%, the lowest since April. The Purchase Index surged 13% to 497, while the Refi Index recorded a more modest gain of 3% to 2304, according to the Mortgage Bankers Association. As a percentage of total application activity, refinancings were 45.7% versus 47.7% in the previous report. ARM share slipped to 34.4% from 34.9%.

Mortgage rates were up last week, as the market sold off in response to high oil prices, stronger equities, and the presidential election. Freddie Mac's weekly mortgage rate survey showed the 30-year fixed rate mortgage rate rising six basis points to 5.70%; the 15-year rate averaging 5.08% versus 5.01% last week; and the one-year ARM rate reporting in at 4%, up four basis points. With the increase in rates, it is expected the Refinance Index will slide back towards 2200 or lower in this week's survey.

Prepayment outlook

The housing agencies released their October prepayment reports last Friday, after ASR's Thursday deadline and in general, the reports were expected to be uneventful. Speeds were predicted to increase 5% or less for 5s, 6.5s and 7s, and around 10% to 15% for 5.5s and 6s for both 30-year Fannie and Ginnie MBS. Looking further out, speeds for November and December are expected to be little changed to slightly higher.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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