If supply has been a story over the past several sessions, the topic turned to demand last week. In fact, the buying support pushed week-over-week spreads in 12 to13 basis points in 30-year Fannie Mae 5.5%, 6.5% and 7.0% coupons. Meanwhile, 6s moved in only five basis points after putting in a strong performance the previous week. Dwarfs also did well, averaging 15 basis points tighter for 5% through 6.5% coupons.

Over the week, mortgage bankers brought about $7 billion to $8 billion, roughly half of which was sold during the week of Nov. 11. Most of the supply was in 30-year 5.5s. Hedge funds, money managers, banks and servicers scooped up the volume as well as the overhang from the previous week. Before the trend turned, traders had suggested that their long situation created from the heavy supply was reversing and that desks were becoming short.

This week is expected to be fairly quiet due to the full close on Thursday for Thanksgiving, and early closes on Wednesday and Friday. One source of support, though, should be indexers on month-end extension buying. Preliminary numbers suggest Lehman Brother's MBS Index will extend 0.11 years, slightly better than average.

Refi Index jumps 28%, prepayments to remain high

For the week ending Nov. 15, the Mortgage Bankers Association (MBA) reported a jump in mortgage applications as mortgage rates hit new record lows. The Refi Index rose 28% to 6174 (and would have been higher if the number had been adjusted for the Veterans Day holiday), while the Purchase Index gained 3.5% to 345. As a percentage of total applications, refinancing activity was 77.6% versus 73.0% in the previous week. Meanwhile, the share of ARM activity decreased to 11.9% from 13.3%.

Freddie Mac reported an increase in mortgage rates for the week ending Nov. 21. This was less than expected. The 30-year fixed mortgage rate increased nine basis points to 6.03%, the 15-year gained 12 basis points to 5.44%, and the one-year ARM reported at 4.41% versus 4.37% last week.

Based on the strength of application activity, Lehman expects high prepayments through January. Bear Stearns is predicting 6.5% and lower coupons to peak in December and higher coupons to peak in November. The December report has speeds slowing modestly and holding at those levels at least through April. The latest average Street expectations are shown in Table I for certain Fannie Mae and Ginnie Mae coupons and vintages.

A smaller coupon universe?

"Can there be another refi event in a smaller coupon universe?" asked a report from Bear Stearns. The analysts addressed the issue of the future mortgage market and refinancings. With so much of the mortgage universe consisting of just a few coupons, there has been some talk that the odds of another refi event is fairly low.

Bear Stearns suggests this is not necessarily so. One reason is that the mortgage universe will not be concentrated in a single coupon. They project that, by mid-2003, the coupon distribution will be approximately 3% in 5s, 27% in 5.5s, 31% in 6s, 21% in 6.5s, 10% in 7s and 4% in 7.5s. Bear also points out that the skewed coupon distribution, in addition to the increased efficiencies in the refinancing process, "ensure that the next major refinancing event is only 50 basis points away." Bear researchers believe the next refi trigger is 5.70%. This level would represent another low in mortgage rates and expose over 90% of the future mortgage market to a refi incentive. The bottom line of this, says Bear, is that it's premature to suggest that this is the last of the refinancing waves.

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