With rates moving to record lows for the week ending Aug. 16, it is not surprising that mortgage applications took off. The Refinancing Index jumped 14% to 5524. This is just under November 2001's record of 5535, according to the Mortgage Bankers Association (MBA). The Purchase Index also rose 5.3% to 371.6.

As mortgage rates hold near record lows, the Refinancing Index is expected to move higher. UBS Warburg analysts predict the Index will top 6000. As a result, prepayments have been revised higher.

In addition, peak speeds, which had originally been expected in September, are now pushed back into October. At this time, speeds on Fannie Mae 2001 6s are expected to hit 32% CPR in October compared to 11% in July; 2001 6.5s are expected to reach 53% CPR versus 25%; and 2001 7s are predicted to prepay at 65% CPR, up from 37%.

Refinancing activity, as a percentage of total applications, represented 70.8% versus 68.8% the previous week. According to the MBA, this was the first time that the share of refinance applications was above 70% since the week ended November 23, 2001, when the share of refinance applications was 72.9%. The share of ARM activity decreased to 13.4% from 16.5% the previous week.

Fixed mortgage rates crept higher according to Freddie Mac's latest survey. For the week ending August 23, 30-year fixed mortgage rates gained five basis points to 6.27%, and 15-year fixed mortgage rates rose eight basis points to 5.71%. The one-year ARM rate, however, fell to 4.34% from 4.39%.

Street turns neutral

After strong originator selling in the previous week, mortgage bankers were conspicuously absent last week despite the back up in Treasury yields. Supply held at less than $1 billion per day. According to Deutsche Bank Securities researchers, it seems new product is currently going straight to the servicing arm for pipeline hedging purposes. They warn, however, that if rates reverse course and move higher, the supply taken down by the servicers could be unleashed to the Street.

At the same time, mortgages continued to attract the usual investors of late. One special note, however, was strong overseas buying reported on Wednesday mostly in Ginnie Maes. Over the Wednesday-to-Wednesday period, spreads were tighter in 30-year 5.5% and 6% coupons. Higher coupons were wider with the greatest movement outward recorded in 7s and 7.5s at plus 10 and plus 15 basis points, respectively. Spreads on 15-year currents and cusps held within a narrow range.

With the higher prepayment and supply risks, the Street is generally neutral on the sector. Some longer-term positives, however, are lower volatility and increased buying from the GSEs.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.