Mortgage spreads moved wider over the past week as Treasurys held lower and volatility increased. Fannie Mae 30-year 6s weakened six basis points and 6.5s through 7.5s moved out about 13 basis points. 15s showed similar performance with 5.5s wider by seven basis points, and 6s through 7s out around 16 basis points.
Overall activity last week was rather modest versus recent sessions due to the increased convexity, prepayment, and supply risks. Originators were light at about $1 billion and less on a daily basis. Hedge funds remained the most active buyers, but traders note that their enthusiasm for the sector has been lower at the higher volatility.
Looking ahead to this week, activity will be roll-related as 48-hour notification begins on Monday, Aug. 12, for 30-year conventional MBS, and on Thursday for 15-year MBS.
July prepayments
July prepayment speeds zoomed higher, as expected, on the drop in mortgage rates. Speeds on most 30-year conventionals were in line with expectations. For example, 2001 Fannie Mae 6s rose from 8% CPR to 11%; 2001 7s came in at 37% CPR, up from 27% CPR; and 2000 8s prepaid at 52% CPR compared to 44% in June.
Meanwhile, 2001 6.5s prepaid slightly faster at 25% CPR versus expectations of 22% CPR. Bear Stearns said the timing of the number is evidence of the influence of hybrid ARMs in this refinancing wave. The incentive to switch into hybrids was 75 to 120 basis points, noted Bear, substantially more than refinancing into 30-year loans.
Finally, 2000 8s prepaid slower than expectations at 49% CPR versus 54% CPR. This is just 9% higher than June speeds.
Ginnie Mae prepayments came in slightly faster than expectations for 2001 6s through 7s. Speeds on 2001 6s averaged 9.5% CPR; 6.5s 22% CPR and 7s 38% CPR. Expectations were 8%, 17% and 36% CPR, respectively. Meanwhile, 2000 7.5 were right on target at 48% CPR.
Speeds on unseasoned vintages were essentially on top of conventional speeds, and suggests to Bear Stearns that increasing numbers of FHA/VA borrowers are able to refinance into conventional product. In the higher coupons, Ginnie speeds are prepaying faster than conventionals. For example, 2000 Ginnie 8s and 8.5s prepaid at 53% and 59%, respectively, versus 49% on Fannie 8s and 8.5s. In comments, Bear Stearns says that the more liberal LTV and credit criteria now seen in the conventional sector is extending into FHA/VA borrowers.
Looking ahead to the next reports, sharper increases are predicted as mortgage rates hit record lows. JPMorgan Securities predicts 2001 Fannie 6s to come in at 20% CPR next month, 6.5s to come in at 45% CPR, and 7s to prepay at 51% CPR. Speeds are expected to peak in September or October at this time. Currently, Bear Stearns anticipates peak speeds of 17% CPR on 30-year 2001 6s; 39% CPR on 6.5s; and 55% on 7s. 2000 7.5s are predicted to hit 66% CPR and 8s 62%. Peaks are expected to be hit in October.
Mortgage Indexes
The Mortgage Bankers Association (MBA) reported an increase in mortgage applications for the week ending August 2. The Purchase Index rose 4% to 374 and the Refi Index gained 7% to 5097. In a recent report, Bear Stearns noted that if the Refi Index breaks 5000, they expect to see faster prepayment speeds than observed in 2001 and slightly higher fixed rate supply. As a percentage of total applications, refinancings increased slightly to 68.4% from 67.6%. ARM share, however, declined 1% to 17.8%.
Freddie Mac announced new record low levels on both 30- and 15-year fixed-rate mortgage rates for the week ending Aug. 9. The 30-year rate dropped to 6.31% from 6.43%, and the 15-year rate plunged to 5.69% from 5.84%. The one-year ARM rate averaged 4.37% versus 4.45% last week. With the drop to record levels, the MBA's Refi Index is predicted to climb towards 6000. This will bring record prepayments, as noted above, and record supply. Bear estimates peak issuance to hit $124 billion.
