For the week ending May 16, Freddie Mac reported that mortgage rates hit new record lows. The 30-year fixed mortgage rate fell to 5.45%, down 13 basis points from last week. The previous record low was 5.61% set in March. The 15-year fixed rate mortgage rate reported in at a record low of 5.84%, compared with 4.97% last week. The previous record - also set in March - was 4.93%. Finally, the one-year ARM rate was essentially unchanged at 3.68% versus 3.67%, which is a record low.

The media effect has started and could help lift the Mortgage Bankers Association's (MBA) Refi Index to a new record high in the next report. Lehman Brothers says it expects the MBA Refi Index to average 9000 in the coming weeks as rates hold at or near record low territory.

This, of course, changes the outlook for prepayments and paydown volumes for the summer. Previously, the outlook was for speeds to start declining, albeit slowly, beginning in June. At this time, it looks like peaks will occur in June - possibly July - versus previous expectations of April/May. Lehman is now projecting peak speeds of around 40% and 60% CPR for 2002 5.5s and 6s, respectively. UBS Warburg is currently forecasting peaks of 38% on 2002 5.5s and 59% on 6s. UBS calculates that 76% of the mortgage universe is fully refinanceable and 97.6% is at least marginally refinanceable.

Paydowns in April reached a record $101 billion, stated Lehman. With prepayments forecast to increase in the coming months, paydowns are likely to set new records, if not in May, definitely June.

For the week ending May 9, the Refi Index jumped 19% to 7250. This was in line with expectations. The Purchase Index, meanwhile, was little changed at 415, compared with 416 in the previous report. Refi applications rose to 72.4% from 68.7% as a percentage of total application activity. Despite ARM rates setting a new record low, the share of ARM activity fell to 12.7% from 13.1%.

Everyone wants mortgages

It is becoming very interesting in MBS land as prices reach record high levels and all coupons are trading over par. Despite these levels, strong buying continues in currents. Spreads on 30-year Fannie Mae 5s held flat, while 5.5s tightened six basis points over the Wednesday-to-Wednesday period on heavy demand. One Street trader noted that investors cannot seem to get enough of 5.5s for several reasons. He noted that the FNMA 5.5% roll is trading through fail, there is no prepayment risk in rolling, and the Street is short the coupon.

In addition to steady interest in the lower coupons, higher coupons attracted investor attention last week. This included some selling in 5.5s to move up to 6s. In comments from UBS Warburg, the firm noted that higher coupons are cheap due to their recent underperformance. In particular, they noted that 6-5.5s are "the most out-of-whack price spread." Over the week, 6% coupons tightened three basis points.

Meanwhile, 15-year MBS continue to lag 30s. Over the Wednesday-to-Wednesday period, dwarf 4.5s widened five basis points while 5s were flat. JPMorgan Securities expects 15s to remain weak as originators are heavy with supply and investors are shunning the sector as rolls collapse. In addition, the firm believes the sector is experiencing some "repricing" related to faster prepayments.

Needless to say, originator selling held within normal amounts of $1 billion to $2 billion per day, well below what the market needs. On the supply issue, JPMorgan reported that net fixed-rate agency MBS issuance in April was a negative $15.4 billion. At the same time, monthly 30-year net issuance hit a record low of negative $28.6 billion.

Fannie Mae was the only agency that recorded positive net issuance. JPMorgan says the discrepancy between Gold and FNMA issuance "is reaching potentially alarming proportions." Since July 2002, the amount of outstanding Gold 30-year paper has decline by nearly $100 billion while net supply of Fannie Mae 30s has risen $27 billion. This has led to all Gold/FNMA swaps trading at negative levels.

FNMA duration gap unchanged

In their April monthly summary, Fannie stated that its duration gap for April was unchanged at negative two months. The GSE also reported that total business volume was a record $139 billion, up 28% from April. Retained commitments rose to $41.4 from $39.5 billion. The retained portfolio was up 2.9% to $817.9 billion on portfolio purchases of $43 billion versus liquidations of $40.5 billion. Outstanding commitments were essentially unchanged at $72 billion. This brings FNMA's total mortgage position to $890 billion, also unchanged from the prior month.

The average monthly duration gap for April was unchanged at negative two months, narrower from negative five months in February. Over the last two weeks, market conditions may have put pressure on this measure once again, namely because of the rally in the curve. Some of this may have been mitigated by reported mortgage pass-through buying over that period as well.

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