Last week started off with better selling, especially from originators, as investors quietly waited for the FOMC meeting to conclude. Since Friday, Sept. 12, mortgage bankers have sold more than $13 billion. Most of the supply was in 30-year 5.5s; however, selling included 5s.
Mortgage buying picked up following the FOMC announcement. Buyers, who had been sidelined, came in and scooped up 5.5s, which have become the cheapest coupon on the stack following the heavy supply. As rates continued to rally on the week, increasing interest was seen in 5s.
At this time, it appears the Fed will not raise interest rates until mid-2004 at the earliest. Continued low rates, a steep yield curve, favorable technicals and attractive fundamentals are helping to keep mortgages attractive, and any widening is likely to attract investors. Last week saw good support from a wide range of investors including insurance companies, money managers, mutual funds, pension funds and hedge funds. Banks have also started to show increasing interest, but it is still not to the level that is anticipated given the amount of cash they have available from paydowns and deposits.
Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 5s through 6.5s tightened three to four basis points. Dwarf 4.5s and 5.5s were firmer by five basis points, while 5% coupons were in three basis points.
Mixed mortgage application report
Mortgage application activity was mixed for the week ending Sept. 12, according to the Mortgage Bankers Association (MBA). On a seasonally adjusted basis, the Purchase Index rose 6% to 432 while the Refi Index declined 15% to 2439. Analysts were expecting the Refi Index to hold above 2300. On an unadjusted basis, however, both indexes rose with the Purchase Index surging 30% and the Refi Index gaining nearly 6%. As a percentage of total applications, refinancings declined to 49.9% from 55.0% in the previous report; however, ARM share increased slightly to 22.4% from 21.6%.
Fixed mortgage rates back to late July levels
Freddie Mac reported a substantial decline in fixed-rate mortgage rates for the week ending Sept.19. The 30-year fixed-rate declined 15 basis points to 6.01%, slightly below expectations, and the 15-year fixed-rate fell to 5.30% from 5.46%. Lastly, the one-year ARM rate slipped six basis points to 3.81%.
Since the 30-year rate peaked at 6.44% on Sept. 4, the rate has come down 43 basis points. It is still 80 basis points above its record low of 5.21% recorded in June.
At current rate levels, JPMorgan Securities expects the Refi Index to stabilize around the 2300 to 2500 area. If rates drop another 25 to 30 basis points, the Refi Index could move to the 4500 to 5000 range, JPMorgan adds.
Dramatic dip expected in September prepays
At this time, consensus is expecting a dramatic decline in speeds in September. Beyond that, says Lehman Brothers, declines should be less significant if rates hold within the 5.90% and 6.25% area as they have for most of August and September. Regarding Ginnie Maes, speeds are expected to slow similarly in terms of percentage declines; however, by the November report, consensus is expecting speeds to hold flat to increasing slightly. The table gives the latest consensus outlook on 30-year Fannies and Ginnies.