Mortgage flows last week were weighted by slightly stronger originator selling and sidelined investors. Over the Wednesday-to-Wednesday period, spreads on 30-year 5.5s moved out seven basis points while 6s widened by one. Meanwhile, 15s outperformed 30s with spreads three basis points weaker in 5% coupons and flat in 5.5s. With rates moving lower and the prospects of increased volatility and lower supply, investors preferred 15s.

The Mortgage Bankers Association (MBA) reported a mixed report on mortgage applications for the week ending Feb. 21. The Purchase Index fell 7.5% to 309.0, while the Refi Index jumped 10.1% to 5989.6 on a seasonally adjusted basis. On an unadjusted basis, purchases were down 14.2% and refi's were off 1% to 5390.6. Analysts expected the Refi Index to be higher as rates hit new record lows last week. The MBA also reported that refi activity increased over the week. As a percentage of total applications, refi applications rose to 75.3% from 72.5%. ARM share activity held steady at 13.3% versus 13.2%.

According to analysts from Salomon Smith Barney, the indexes were adjusted for a half-day holiday for President's Day. If the number had used a full-day adjustment, the Refi Index would have surged to over 6700 they say.

For the week ending Feb. 28, fixed mortgage rates moved lower to a new record low. According to Freddie Mac's survey, the 30-year fixed mortgage rate reported in at 5.79%, down five basis points from last week, and the 15-year fixed mortgage rate fell seven basis points to 5.14%. Meanwhile, the one-year ARM rate rose two basis points to 3.83%.

BMA reports record issuance in 2002

According to the Bond Market Association (BMA), bond issuance in the US surged to a record $5.4 trillion in 2002, up 18% from 2001. In the mortgage sector, issuance jumped 38% to $2.31 trillion as a result of low mortgage rates that spurred record refinancings. In the fourth quarter, issuance totaled $773.8 billion, a 45% jump from the third quarter.

By type, agency MBS equaled $1.46 trillion, a 34% increase from 2001. Fannie Mae's issuance topped $739 billion, up 40% from the previous year, and Freddie Mac issuance rose 40% to $545 billion. Ginnie Mae issuance, meanwhile, was little changed at $174 billion versus $174.6 billion in 2001.

CMO issuance surged 49% to $540.9 billion for the year. Freddie Mac's totaled $332 billion, a 72% jump from the previous year; Fannie Mae issuance rose 17% to $143.9 billion; and Ginnie issuance rose 41% to $65 billion. The ABS sector also set a record last year with issuance totaling $485 billion versus $426 billion in 2001. Home equity issuance gained 34% to $159 billion, benefiting from the low rate environment.

In other sectors, corporate bond issuance fell 26% to $594 billion due to the slowing economy, declining consumer confidence, accounting scandals and other management issues. Long-term agency issuance set a record at $1.04 trillion, a 13% gain. Regarding the GSEs, Freddie Mac issuance increased 26% to $296 billion, while Fannie Mae issuance fell 4% to $239 billion. Short-term agency debt increased 6% over the year to $669 billion. In this sector, Freddie Mac's issuance fell 5% to $164 billion, while Fannie Mae's rose 18% to $304 billion. Finally, Treasury issuance totaled $3.2 trillion, up 8% from 2001.

Looking ahead to 2003, the BMA predicts issuance to drop in the MBS and ABS sectors. The association forecasts MBS issuance to fall 25% to a still strong $1.78 trillion. Both agency MBS and CMO issuance are projected to fall 26% to $1.08 trillion and $381 billion, respectively, this year. Meanwhile, the ABS sector is expected to record a small decline to $414 billion, partly attributable, on a decline in home-equity issuance as rates increase later this year.

Prepayment speeds expected to increase through the spring

According to a report from Bear Stearns, 83% of the mortgage universe ($2.34 trillion) is exposed to a minimum 40 basis point refi incentive (see related story on p. 15). Analysts note that under normal circumstances, the record low mortgage rates currently would result in record exposure and Refi Index levels. However, the massive amount of 5.5% issuance has reduced the size of the exposed market. As a result, they expect the Refi Index to move above 6000, but not to break October's 6926 peak.

Still, this prepayment wave is going to be extended for several more months. At this time, researchers from Bear predict more seasoned speeds to peak in May with 2001 6s hitting 51% CPR, 2001 6.5s hitting 68% CPR and 2001 7s hitting 67% CPR. Unseasoned issues, however, are expected to trend higher through at least July with 2002 6s reaching 37% CPR and 2002 6.5s reaching 66% CPR.

Street consensus shows speeds on 30-year MBS flat to slowing about 3% in February from January's levels. March speeds are expected to increase 10% to 20%, while April is looking at slightly smaller gains. See table for the latest prepayment expectations. The February report comes out on Friday, March 7.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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