The first half of last week saw a reprieve from the subprime tape bombs. In fact there was some encouraging news with Goldman Sachs saying it didn't expect to report significant write-downs, while Bear Stearns reported it would take a much less than expected write-down. This helped the markets calm down with equities rallying (helped by financials that were considered oversold) and Treasurys giving back some of their recent gains. At last Tuesday's close, the 10-year Treasury closed down 8/32nds from Friday (Monday was a holiday) with the yield up three basis points to 4.255%; 2s10s were flatter at 73 basis points, down from 79.5 basis points previously.
The retreat, along with a dip in volatility and tightening in swap spreads, brought out active buying in mortgages on Tuesday as investors took advantage of the significant widening. Noted in particular was buying from money managers and hedge funds in 5s and 5.5s, overseas interest in 6s and servicer buying in 5.5s and 6s against swaps and Treasurys. Selling was picking up on Wednesday morning as the market held to a narrow range-equities included. Overall, supply was averaging between $1billion and $1.5 billion through Wednesday.
Month to date through Tuesday, Nov. 13, Lehman Brothers' MBS Index was lagging Treasurys by 98 basis points. Performance in other cross-sectors has also been bad with CMBS performing the worst so far at -171 basis points, followed by corporate bonds at -104 basis points, while ABS are the "best" performing at -47 basis points.
Outlook
This week is expected to be relatively quiet as many participants will be out for the Thanksgiving week given the full close on Thursday and the two short trading sessions on Wednesday and Friday. The economic calendar is also very light, but it does include some housing news: The NAHB Index on Monday and housing starts on Tuesday. Also on Tuesday, the FOMC will release the minutes from its Oct. 30-31 meeting. Closing out the week are initial claims and leading indicators on Wednesday. Given the substantial widening in MBS recently on the strong flight to quality, there is a more positive outlook for MBS for the very near term. For example, Barclays Capital turned neutral from negative as it expects a brief "snap-back" in performance. Over the longer term, however, spreads are expected to be pressured on a number of fronts including balance-sheet constraints, limited sponsorship, increased supply, higher volume, ongoing subprime/housing/credit headlines and weak dollar rolls.
Latest Housing News
* All three rating agencies placing Countrywide Financial on negative ratings watch. In response, the firm warned that if its rating is cut further it could impact its ability to raise money.
* The Pending Home Sales index rose 0.2 in September said the NAR. It was the first increase since June and came as a surprise given all the housing news lately. The Midwest and South reported increases, while the Northeast and West were lower.
* Bear Stearns reported it would take a $1.2 billion write-down in the fourth quarter related to subprime investments. This was less than what Wall Street expected. Bear also said it believes the worst of the write-downs was past.
Mortgage Application Activity Rises 5.5%
Mortgage applications rose in the week ending Nov. 9 in response to the 16-basis-point decline in 30-year fixed mortgage rates in the past three weeks. In the previous report, activity slipped despite the improvement in mortgage rates.
According to the Mortgage Bankers Association, the Refi index rose 6.4% to 2315.7. This is slightly above the 2312 hit in the week of March 9 and the highest since mid-September 2005 when it was at 2354. The purchase index also increased 4.8% to 432.6.
As a percent of total applications, refinance share was 50.2%, up from 49.1%. ARM share was also higher at 15.5% versus 14.2%.
Prepayment Outlook
Current estimates suggest prepayments on Fannie Mae 30-years will decline about 11% on average in November, although 2006 vintages are seen slowing less as they continue to move up the seasoning ramp. Influencing speeds are a lower number of collection days - 20 in November versus 22 in October - and slowing seasonals, not to mention the weak housing market and tighter underwriting standards. Looking out to December and January, speeds currently are predicted to slow less than 10%.
In the latest senior loan officer survey from the Federal Reserve, a significant number of the respondents reported tighter credit standards for residential mortgage loans. For example, regarding prime loans at large banks, the October survey reported that 48.4% of respondents said standards had remained basically unchanged, while another 48.4% said standards had tightened somewhat. This compares to 81% reporting basically unchanged standards in the July survey, and 19% reporting somewhat tightened standards. In the nontraditional loans, 22% had tightened considerably versus 7% in the previous survey and 41% had tightened somewhat compared to 39%. In the subprime category, Fed analysts noted that five of the nine banks that originated these kinds of loans said they had tightened their lending standards - a proportion about as large as the July survey.
The latest survey also reported weaker demand for mortgages to purchase loans in the past three months; 48% of large banks said demand for prime loans was "moderately weaker" compared with 30% in July, and 13% said "substantially weaker" versus none previously. In nontraditional residential mortgages, 33% and 22% of the large bank respondents, respectively, reported moderately weaker and substantially weaker demand. Back in July, 28% saw moderately weaker demand, while just 10% saw substantially weaker demand. The results are similar for the subprime category with 50% of the large banks reporting moderately weaker demand compared with 33% previously. The percentage of those reporting substantially weaker demand remained at 17%.
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