Mortgages continued to grind tighter last week as the technical situation remained the dominant theme. Spreads in current coupon 15s and 30s moved in five basis points over the Wednesday-to-Wednesday period. Meanwhile, 6.5% and 7% coupons were seven to eight basis points firmer on some up-in-coupon interest that has crept into the market. In comments from RBS Greenwich Capital, analysts note that interest in fuller coupons may be premature. They say that as long as the market remains range bound, and mortgage banker staffing levels high, homeowners with higher mortgage rates will be getting calls to refinance. The bottom line, say researchers from RBS Greenwich, is higher coupons may not burn out as quickly as expected.

Refi Index holds firm on low rates

For the week ending Jan. 10, the Mortgage Bankers Association (MBA) reported little change in mortgage applications. This is very impressive since the previous two weeks were holiday adjusted and sometimes can overstate activity. The Refi Index declined 1% to 5786 and the Purchase Index was down 5% to 358 on a seasonally adjusted basis. Unadjusted, however, the Refi and Purchase Indexes surged 41% and 42%, respectively. Analysts from Lehman Brothers expects the Refi Index to hold above the 5000 level for the remainder of January.

The MBA also reported that refinancing activity represented 77.7% of total applications, virtually unchanged from the previous week's 77.8% number. The share of ARM activity increased to 12.6% from 11.9% the previous week.

Freddie Mac reported that mortgage rates were little changed for the week ending Jan. 17. The 30-year fixed rate mortgage rate rose two basis points to 5.97%; the 15-year fixed mortgage rate gained three basis points to 5.36%; and the 1-year ARM rate was unchanged at 4.03%. At these levels, 85% of the 30-year conventional MBS universe is exposed to a 50 basis point refi incentive, says analysts from Credit Suisse First Boston, which will keep mortgage application activity strong.

Prepayments expected to hit new peaks in March

Following the December prepayment release, the Street is beginning to release revised projections for the coming months. In a recent report, UBS Warburg analysts said they expected speeds to decline modestly in the next two reports before increasing back to December levels in March. JPMorgan Securities researchers also anticipate only very slight declines in January and February, but they predict that March speeds will be higher than December's levels. Overall, they expect speeds to remain within 10% to 15% of current levels for the next four months. "That would imply that about a quarter of the mortgage market would have refinanced from October through April," analysts write.

Deutsche Bank researchers, on the other hand, are looking for speeds to increase steadily in January, February and March due to the drop to record low mortgage rate levels in December.

Fannie's duration gap stays within range

Fannie Mae released their December monthly portfolio summary last week. In recent months the debt market has focused in on the duration gap of the GSE's portfolio. The gap moved to -5 months in December from +2 months in November. The reading keeps FNMA just within its preferred +/-6 months target range. Conjecture on the Street, however, suggests that duration gap has probably improved in recent weeks, moving to about zero months. The move owes to an uptick in rates since the turn of the year, as well as large-scale mortgage origination selling seen earlier this month. In Q4, the gap averaged -3 months, compared to -11 months in Q3 and -1.7 months in Q2.

Ginnie Mae announces changes to its GNMA II program

On Jan.10, Ginnie Mae released changes to its GNMA II program which will become effective July 1, 2003 (see related story on p. 16). The changes include the following:

* The spread of the note rate eligible for inclusion within a GNMA II pool will be reduced to 25-75 basis points over the security rate.

*The minimum servicing fee will be 19 basis points versus 44 basis points currently.

* Buydown loans cannot be over 10% of a multi-issuer pool. Single issuer pools may be entirely buydown loans, but they must be designated "BD" if buydown loans make up more than 10% of the pool.

Ginnie Mae decided against changing the pay date on Ginnie II pools from the 20th of the month to the 15th. The Street was generally not in favor of this proposal because of the potential to fragment the market.

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