Last week saw some reversal in recent mortgage market activity. Originators, which had been selling per day amounts of about $2 billion in the previous week, averaged around $750 million. The selling dried up as rates rallied over 30 basis points throughout the week on increased expectations that the Fed would cut rates before yearend.
Investor flows were mixed with profit taking noted from money managers and hedge funds. There was modest buying, focused primarily in current coupons of both 30- and 15-year MBS. Spreads over the Wednesday-to-Wednesday period were two basis points wider in 30-year Fannie Mae 6% coupons, and nine and 17 basis points, respectively, in 6.5s and 7s. Dwarfs were two basis points wider in 5.5s, plus seven basis points in 6s, and plus 19 basis points in 6.5s.
Prepayment peak moved
up to November
The supply and prepayment expectations are certainly getting whacked around with a backup, and now a rally. At this time, Bear Stearns sees peak levels being hit in November, not in December, due to the backup in rates prior to this latest rally. In December, they are projecting slowing of 10% or less, with a sharper fall-off in January. They caution, however, that if rates continue to decline and return to the 6.0% level, sharp upward revisions will be made to their forecast after December.
Credit Suisse First Boston said they expect speeds to post significant month-over-month declines in January. In addition, they expect gross issuance is likely to peak in January and start declining in February.
The Street may be getting ahead of itself as mortgage rates dropped last week. The next few weeks will determine if speeds will slow as much as is currently projected beginning in January.
Rates give back
previous week's gains
For the week ending Oct. 25, mortgage applications declined according to the Mortgage Bankers Association (MBA) as mortgage rates increased to the low 6.30s. The Purchase Index fell 6% to 339, and the Refi Index dropped 24% to 4240. Since peaking four weeks ago at 6927, the Refi index has fallen 39%. Still, applications are historically high at over 4000. For the record, the Refi Index has been over 4000 for 14 weeks.
On an unadjusted basis, however, applications were mixed. The Refi Index fell 16%, but Purchases increased 4%. In the MBA's report, they noted that refinancing applications as a percent of total applications fell to 69.2% from 73.4%, and the ARM share increased to 15.2% from 13.9%.
Freddie Mac reported Thursday that mortgage rates declined with changes more than making up for the previous week's increases. The 30-year fixed mortgage rate declined 18 basis points to 6.13%; the 15-year fixed rate fell to 5.51% from 5.70% last week; and the one-year ARM rate reported in at 4.25%, down five basis points.
The drop in rates suggests mortgage application activity will pick up next week. Commenting on refinancing applications, Bear says that at a 6.25% mortgage rate level, refi applications as a percentage of total applications should remain above 50%, and the Refi Index should stabilize in the 4000 to 5000 range. If rates drop towards 6%, they believe the index could easily return to the 6000 to 7000 level.