MBS flows last week centered around better buying, particularly from banks, money managers and arb accounts due to the dramatic widening in spreads in recent weeks on supply and prepayment fears. Helping the turnaround was the 55-basis-point back-up in interest rates over the past week and a half that has Wall Street analysts revising peak prepayment levels.
Somewhat surprising was the lack of originator selling, limited to about $1 billion per day on average, given that mortgage rates hit record lows last week. Apparently, mortgage originators bypassed the Street and sold directly to mortgage servicers. The combination of strong buying and limited selling contributed to spreads tightening about 10 basis points on average for most coupons.
MBA Refi Index Sets Record
With mortgage rates hitting record low levels for the week ending November 9, it wasn't surprising that the MBA Refi Index moved to a record high level of 5535. This eclipsed the previous record of 5253 set the week of October 12. In addition, the MBA announced that refinancing applications as a percent of total applications set a new record at 78.4%. The previous record was 76.5% set also for the week ending October 12.
While the Refi Index has climbed over the past two reports, the AFS Title Search Index has declined since peaking at 289.3 announced on October 19. The index fell to 278.8 on October 26 and to 265.8 on November 5. Paul Descloux, director of the service, noted that "since the AFSTSX contains both data on refinancings and home sales, the fundamental and seasonal decline in housing turnover may be having a substantial negative effect" on the index.
Looking ahead, this week's MBA Refi Index will be distorted by the Veteran's Day holiday. The following report should see slowing related to the Thanksgiving Day holiday. In addition, the increase in interest rates should have a dampening effect on applications. Regarding the AFS Title Search Index, initial mortgage activity is expected to slow as it traditionally does between Thanksgiving and year end.
November prepayments are expected to record similar to modestly smaller percentage increases than seen in October's Fannie Mae report for most vintages in 7% coupons and higher. Speeds on unseasoned 6s and 6.5s, however, are expected to show substantially larger gains. For example, Lehman predicts 2001 6.5s to surge 290% in November. In October, the coupon jumped 146%.
Ginnie Maes are predicted to show similar performance in November with 7% and higher coupons increasing slightly less than in October. 2001 6s and 6.5s, however, are expected to jump 200% and 300% from October. October's increases were 93% and 119%, respectively.