Last week's trading session was range bound and uneventful. Originator selling held at an average of $1 billion per day, while investor flows were mixed. There was profit-taking, as well as steady interest in lower coupon 30s. Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 5.5s moved out nine basis points, 6s were out one basis point, while 6.5s and 7s were trading five basis points weaker. Dwarf 5s, 5.5s and 6s were nine, six and four basis points wider, respectively.
The lack of supply in a strong housing market continues to be a surprise. According to Lehman Brothers analysts, the total size of the 30-year fixed rate market has shrunk by $70 billion since last July. They attribute the decline to banks holding onto more mortgage loans lately. In fact, according to their figures, real estate loans on bank portfolios have grown by $200 billion in the last six months.
For the week ending Jan. 17, the Mortgage Bankers Association (MBA) reported that the Refi Index fell 6% to 5433 and the Purchase Index fell 1% to 355. Salomon Smith Barney attributed the decline to the long weekend from the Martin Luther King holiday. As a percentage of total applications, refi activity was 75.7%, down from 77.7%. At the same time, the share of ARM activity increased to 13.8% from 12.6%.
As expected, Freddie Mac reported declines in mortgage rates in its latest report. For the week ending January 24, the 30-year fixed rate mortgage rate dipped 6 basis points to 5.91%; 15-year mortgage rates declined to 5.31% from 5.36%; and the one-year ARM rate reported in at 3.93% versus 4.03% in the previous report. This is a new record low for ARM rates since Freddie Mac began tracking it. The previous low was 4.01% hit in late December.
With mortgage rates holding low, the MBA Refi Index is expected to hold above the 5000 level through January.
The strength of mortgage applications suggests that January's prepayment report will see declines of about 5% or less. February is predicted to show slightly greater slowing, while March is looking to equal or exceed December's report.