Prepayment speeds increased over 50% on average in October. The increase was due in part to a longer business day count, 23 days vs. 17 days, as well as sharply lower rates. Lehman Brothers estimates an average of 6.75% vs. 6.97% in September. Bear Stearns adds that next month's report will reflect a 6.61% mortgage rate and given that the current mortgage rate is about 6.40%, they expect refinancings to intensify.
GNMA/FNMA
October prepayments
Ginnie Maes generally increased less than conventionals in October. This was expected by some based on the lag in the MBA's Government Refi Index vs. the Conventional Refi Index. Salomon Smith Barney suggests that coupons at the cusp tend to be less reactive because of the greater financial hurdles that Ginnie Mae borrowers face when refinancing. According to Salomon, the aggregate speed increase on 30-year GNMA 6s was 10% vs 44% for FNMAs; 6.5s was 22% vs +67%; and 7s was +52% vs +64%. There was less of a difference for higher coupons.
The October prepayment reports were just the tip of the iceberg. Credit Suisse First Boston notes that prepayments in October were initiated by applications filed in August and September. At that time, the MBA's Refi Index averaged about 2200. Since the beginning of October, the non-seasonally adjusted index has averaged 4600. CSFB is projecting the following speeds for TBA premiums in Dec/Jan (for 14-20 WALA paper): 6.5s, 40% CPR; 7s, 70% CPR; 7.5s, 80% CPR; and 8s, 70% CPR. This compares to projections of 30%, 57%, 69%, and 62% CPR, respectively, by UBS Warburg.
Selling, buying mixed last week
With the exception of Friday, November 2, when originators came with $5 billion in supply, and servicers with another $3 billion in sales, selling has been rather modest. Through last Thursday, mortgage banker selling has been between $1 billion and $1.5 billion on any given day.
Arb accounts and money managers were the most active buyers for the most part, with bankers taking a bit of a break. Banks are expected to continue to be strong buyers as last week's 50 basis point rate cut by the Fed has further enhanced the spread between mbs and cost of funds. Following Wednesday's prepayment reports and the announcement by the MBA that its Refi Index surged 24% to 5223, institutional investors took profits in the higher coupons on fears of further increases in speeds. Reinvestment was targeted into lower coupons and particularly in 15-year mbs.
Wall Street is about evenly divided on their recommendations towards the mbs sector. In research last week, JPMorgan and Morgan Stanley recommended neutral positions; CSFB and UBS Warburg recommended modest overweights; and Lehman and Salomon Smith Barney preferred modest underweights. Investors also appear to have mixed views as well. According to JPMorgan's latest bi-weekly MBS Client Survey, the share of neutral investors decreased noticeably from 51.3% to 38.3%. At the same time, the share of overweights increased to 29.8% from 25.6%, as did underweights to 31.9% from 23.1%. JPMorgan attributes the divergent views among investors to concern with the technical deterioration in the market, while the quality, liquidity and carry continue to attract others.
Fixed mortgage rates dip to record lows
FHLMC announced on Thursday that 30- and 15-year fixed rate mortgage rates dropped to record low levels. The 30-year rate dropped 11 basis points to 6.45% and the 15-year rate fell 10 basis points to 5.94%. The one-year ARM rate increased slightly to 5.30% from 5.26%.
With mortgage rates dropping to record low levels, the MBA's Refi Index is expected to increase further this week, and also outpace the previous record of 5252 set in October. As noted above, the Refi Index jumped 24% last week to 5223. In addition, the Purchase Index rose 20% to 318.
