Unlike the previous week, which saw over $21 billion in originator supply, last week's levels averaged between $1.5 billion and $2.0 billion per day. At this time, the Street is estimating current monthly fixed-rate issuance at between $120 billion and $140 billion. Looking ahead, Lehman Brothers predicts supply in lower coupons over the next year will hit nearly $1.4 trillion.
While gross supply is high, net fixed-rate issuance has been declining. According to JPMorgan Securities, net issuance for October is looking flat, following third quarter net issuance that was negative.
While supply was limited, demand was very strong last week, especially in the lower coupons of both the 30- and 15-year MBS sectors. Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 5.5s tightened 12 basis points; and 6.5s through 7.5s were in five to 10 basis points. 6s, on the other hand, were one basis point wider on supply. In dwarfs, spreads averaged nine basis points firmer in 5s, 6s and 6.5s; and five basis points tighter in 5.5s.
The better buying is attributed to the continuing favorable technical situation in the sector. Price levels have improved on the recent backup, the CMO bid remains firm, GSE demand has been picking up, volatility has been softening, and carry remains good. What more can an investor ask for?!
Treasury sell-off overdone?
In a recent report from Deutsche Bank Securities, researchers stated their belief that the recent sell-off in Treasurys has been more acute than one would have expected, and that fears over convexity hedging unwinds were a factor. They don't see actual sales by hedgers being substantial until the 10-year hits 4.50%. In addition to the impact of hedge unwind fears, Deutsche Bank says there is the potential for a negative response in Treasurys when Fannie Mae releases information on its duration gap. MBS strategist from Deutsche, Alec Crawford, estimates that FNMA has a -3M gap following the recent back up in yields.
Mortgage indexes weaken
Mortgage application activity weakened overall for the week ending Oct. 18 due to gains in mortgage rates. According to the Mortgage Bankers Association, its mortgage applications index fell 12% to 1128. On a seasonally adjusted basis, the Refi Index declined 18% to 5589; on an unadjusted basis, however, the index was down 26% to 5030. For the record, the Refi Index has held over 5000 for 11 out of the last 12 weeks. The decline in the Refi Index was more than what the Street was expecting. MBA economist Phil Colling said that despite the increase, "long-term interest rates last week were at 38-year lows, and the massive wave of mortgage applications that began in late July is continuing."
Regarding purchase applications, the MBA's purchase index rose 5.7% to 362 on a seasonally adjusted basis, but was down 4.9% to 313 on an unadjusted basis. Overall, the purchase index suggests continued healthy housing activity.
Also reported in the MBA's survey, the percentage of refinancings to total applications was 73%, down from 78% in the previous week; and the share of ARM activity increased to 13.9% from 12.8%.
Freddie Mac reported a large increase
in rates for the week ending Oct. 25. The increase was expected and in line with projections. Specifically, the 30-year fixed mortgage rate gained 16 basis points to 6.31%; the 15-year was up fourteen basis points to 5.70%; and last, the one-year ARM rose to 4.30% from 4.27%.
MBA 2003 housing
According to the MBA, the housing market is expected to remain strong in 2003. MBA economists currently forecast housing starts at 1.63 million in 2003 compared to expectations of 1.69 million in 2002, and actual starts of 1.6 million in 2001. Existing home sales are estimated at 5.2 million versus 5.5 million this year. In 2001, existing home sales were 5.3 million. Last, new home sales are called at 910,000 and 945,000 in 2003 and 2002, respectively, versus 908,000 in 2001.
Regarding interest rates, the MBA forecasts an average of 6.5% in 30-year rates in 2003 and 2002. Rates by the end of 2003, however, are predicted to be nearer to 7%.
The MBA anticipates that 2003 originations will reach $1.6 trillion, the third highest level on record. This compares to $2.4 trillion expected this year, and actual originations of $2.0 trillion in 2001. The Refi share is predicted to plummet to 36% compared to 58% and 57% in 2002 and 2001, respectively. The ARM share is anticipated to average 16% in 2003 versus 17% this year, and 12% in 2001.
On the recent backup in mortgage rates and the Refi Index response, Street researchers have lowered their peak December projections. For example, two weeks ago, average estimates had 2002 and 2001 Fannie Mae 6s at 33% and 49% CPR, respectively. This week, estimates are at 28% and 44%. Similarly, 2002 and 2001 6.5s were previously predicted to hit 49% and 67%. Now, the estimate is 46% and 64%. Last, 2001 7s are projected now to prepay at 64% CPR in December compared to a previous estimate of 67%.
But Refi and Supply Wave
to be Prolonged
In comments last week, Lehman Brothers noted that the difference between primary and secondary mortgage rates are still hovering close to 40 basis points despite the significant backup in rates. They had expected that primary rates would move less than secondary rates in a backup. Still, they predict the spread should tighten by around 20 basis points over the next few months as capacity constraints lessen. This should prolong the refinance wave.
According to Credit Suisse First Boston, the recent back up in mortgage rates will not really impact issuance until next March at the earliest. CSFB researchers note that capacity constraints have led lenders to impose 75- and 90-day locks.