Despite the early week downtrade and strong investor support, mortgage spreads moved tighter last week on limited originator supply. Over the Wednesday-to-Wednesday period, spreads on Fannie Mae 5.5s were seven basis points firmer, 6s and 6.5s were in 11 basis points, and 7s were in 19 basis points. Spread performance in 15-year MBS was similar.
Wednesday's larger than expected rate cut by the Fed could keep the markets fairly volatile for the following several days, suggests RBS Greenwich Capital. In fact, in Thursday morning's trading session, there was heavy profit-taking from money managers and hedge funds on recent price gains. Near term, mortgages should benefit as the sector offers attractive yield and spread. Longer term, however, Greenwich says a milder yield curve will eventually catch up with mortgages, as will higher market levels.
October prepayments jump
As expected, October speeds recorded dramatic increases. Fannie Mae 2001 6s rose 54% to 38% CPR, 6.5s gained 25% to 60% CPR, 2001 7s were up 17% to 61% CPR, and 2000 7s hit 74% CPR versus 67% in September. Speed increases were in-line with predictions with the exception of 2001 7s, which came in slightly slower.
In higher coupons, 2000 7.5s prepaid at 70%, while 2000 8s were slower at 60% CPR. In September, these coupons prepaid at 64% and 53% CPR, respectively.
Nomura Securities' Art Frank noted that this report reflects a Refi Index of above 5000, but not yet at the 6000 level. As a result, he expects further gains in November. Most likely, November will be the peak month with December holding close to November's levels. Frank predicts 2001 6s to hit 40% CPR in the next report and 2001 6.5s to hit the high 60s.
Ginnie Mae 2001 6s prepaid at 20% CPR, a 39% gain from September. This is slightly less than the 23% CPR that was predicted. Meanwhile, 2001 6.5s came in at 48% CPR, up from 37% in the previous month. Lastly, 7s increased 18% to 60% CPR.
In 2000 vintages, 7s prepaid slightly faster at 58% CPR, a 12% gain from September, versus a 56% CPR prediction. Also, 7.5s were 2% CPR less than expectations at 65% CPR. The vintage prepaid at 60% in the previous report. Finally, 2000 8s reported in at 60% CPR, a 7% gain. The coupon was expected to prepay at 63% CPR.
In comments from UBS Warburg, researchers expect modest accelerations in speeds next month, followed by stronger accelerations in December. Salomon Smith Barney analysts, on the other hand, expect November speeds to decline since November has three less business days, and December to be flat.
GNMA proposes changes to GNMA II program
Ginnie Mae recently submitted a proposal to the Bond Market Association (BMA) regarding changes to its GNMA II program. Ginnie Mae says this is in response to President Bush's commitment to increase homeownership for minorities by reducing costs. These changes are scheduled to become effective July 1, 2003, and include the following:
* The minimum servicing fee for GNMA II pools or loan packages will be reduced to 19 basis points from 44 basis points.
* The permissible WAC dispersion will be reduced to 50 basis points from 100 basis points.
* The spread of note rates eligible for securitization within a GNMA II pool or loan package will be reduced to 25 to 75 basis points above the security rate.
* The payment delay on new GNMA pools issued after July 1, 2003 will be 15 days versus 20 days. In other words, the new GNMA II pools will have the same payment schedule as GNMA I.
* Buydown loans may not be more than 10% of the original pool balance of a multiple issuer pool.
Researchers at Lehman Brothers believe these changes will have several implications for Ginnie Mae securities. On the positive side, (1) the reduction in the WAC dispersion and limiting buydowns will improve valuation of GNMA II pools relative to GNMA Is; (2) reduced servicing fee means less hedging of servicing rights for originators and will skew originators toward making GNMA II loans versus GNMA Is; and (3) by lowering the GWAC and WAC dispersion, the value of new GNMA II pools will increase over existing GNMA IIs and GNMA Is. On the negative side, Lehman researchers are not in favor of the reduced payment delay because it will create a bifurcated GNMA II TBA market. Also, there is the potential that issuance in the GNMA I program will be hurt and result in reduced liquidity in that sector over the long term.
Mortgage applications rise on lower rates
Mortgage applications rose as expected on declines in mortgage rates for the week ending Nov.1. According to the Mortgage Bankers Association (MBA), the Purchase Index gained 9% to 370 and the Refi Index was up 15% to 4875. The MBA Refi report marked the 15th straight week of above 4000 levels. "The refinance wave that has existed since mid-year is not over yet," noted MBA economist Phil Colling. "Last week's increase in the refinance index reversed a three-week downward trend from its record high, and indicates that the refinance boom is still going strong." In other news noted in the MBA's survey, refis, as a percent of total applications, rose to 70.6% from 69.2%, while the ARM share fell to 13.4% from 15.2%.
Freddie Mac reported a slight decline in mortgage rates for the week ending Nov. 8. The Street was expecting a slight increase as rates backed up early in the week. The latest report recorded a two basis point decline in 30-year fixed mortgage rates to 6.11%, the 15-year fixed rate declined three basis points to 5.48%, and the one-year ARM rate was 4.15% versus 4.25% in the previous survey. Rates have dropped significantly since Oct. 24 when they backed up dramatically on the strong sell-off. On that date, the 30-year reported in at 6.31%, the 15-year at 5.70%, and one-year ARMs at 4.30%.
Looking ahead to this week's MBA survey, the Refi Index is expected to increase further given current rate levels.