Mortgage flows last week were relatively light following the Thanksgiving holiday break. According to one trader, the mortgage market was jittery on the higher volatility associated with upcoming events such as the non-farm payrolls report and the Dec. 8 deadline for Iraq to disclose weapons of mass destruction. This kept many investors in a sidelined or profit taking mode in the early part of the week. By Wednesday afternoon, however, there was better support from banks and CMO desks in 30-year 5.5s and 6s. Last week also saw an increased interest in higher coupons. Traders attribute the better buying as a hedge against an increase in rates as well as potential for improved technicals in the months ahead.
Originator selling held within recent levels of $1 to $2 billion per day. Traders noted that if the market turns lower and stays lower, a pickup in mortgage banker selling would be expected.
Over the Wednesday-to-Wednesday period, spreads averaged seven basis points tighter in 30-year 5.5s through 6.5s and 15-year 5s to 6s. Most of the tightening occurred on Wednesday.
JPMorgan's 2003 outlook for MBS
This is the time of year when analysts begin to focus on the year ahead. First out of the gates with a preview for 2003 is JPMorgan Securities. Researchers predict net supply to be less than $120 billion. The slowing in supply is due primarily to expectations that home price appreciation will slow to 3% to 4% in 2003 (see related story on p. 11). This should become more apparent during the second quarter. By May 2003, they expect the composition of the MBS 30-year universe to consist of 18% 5.5s, 30% 6s, 31% 6.5s, 13% 7s and 5% 7.5s.
On the demand side, the firm believes that at least through the first quarter, banks will continue to be strong supporters of the MBS sector. In a bear-flattening scenario, they expect bank portfolio growth to slow and possibly reverse, especially if the economy starts to recover. GSE support is also expected to be greater in the early part of the year, followed by flat growth in the second half. Lastly, JPMorgan analysts expect money manager support to hold, though not at the levels seen in 2002. All in all, investor support from these sectors is predicted to total around $15 billion per month, compared to $5 billion to $6 billion per month beginning in the second quarter.
Speaking of home price appreciation
Both Freddie Mac and Office of Federal Housing Enterprise Oversight (OFHEO) released third quarter home price data last week. According to OFHEO, average quarter three home values rose 6.2% compared the same period a year ago. This compares to 7.3% reported for quarter two. OFHEO also reported that average house prices in the July-September period rose less than 1% from the second quarter versus 2.4% growth recorded in the Q1 to Q2 period.
Freddie Mac reported a 3.2% increase in home values for the third quarter versus 8.8% in the second quarter. The difference between OFHEO's data and Freddie's is that OFHEO's includes both Fannie Mae and Freddie Mac information. For the 12-month period ending Sept. 30, Freddie Mac noted prices rose 5.5% compared to 9.1% for the one-year period ending March 31, 2002. According to Freddie, the Pacific states recorded the largest gains at 9.0%, followed by the New England states at 7.4%. The slowest regions were the East North Central States, which declined 0.1%, and the West South Central states, which increased only a half percent. Freddie Mac said it expects the rate of home price growth to average 5% to 5.5% in 2003.
Refi Index drops on Thanksgiving holiday
The Mortgage Bankers Association (MBA) reported mixed results for the week ending Nov. 29. On a seasonally adjusted basis, the Refi Index fell 27% to 4152, while the Purchase Index gained 10% to 387. On an unadjusted basis, the Refi Index plunged 49% to 2906 and Purchases dropped 26% to 220. Refinancing activity represented 69.5% of total applications versus 76.6% the previous week. The share of ARM activity increased to 14.0% from 13.4% the previous week.
Freddie Mac reported a small increase in mortgage rates for the week ending Dec. 5. The 30-year fixed mortgage rate increased six basis points to 6.19% 15-year fixed mortgage rates gained three basis points to 5.60% and the one-year ARM rate reported in at 4.21% versus 4.19% in the previous week.
In comments, Lehman Brothers analysts said that if mortgage rates continue at about the current levels, they expect the index to increase above 5000 this week. The bottom line is that prepayments should continue to run at or near record levels. Lehman currently predicts that 2001 6s will prepay at 43% CPR in January versus expectations of 40% CPR in November; and 2001 6.5s to hit 61% compared to 59% CPR estimated for November.