Last week was a good one for mortgages. It started off with the news that Fannie Mae was rescinding its April 4 clean-up call and would not exercise any further cleanup calls.

The second piece of good news was Chairman Greenspan's dovish testimony before the Joint Economic Committee. He noted that the "...Federal Reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view." Based on his comments, Lehman Brothers economists believe the first Fed tightening will not be until the Sept. 24 meeting.

While money managers had been steady buyers early in the week, following Greenspan's report, banks and insurance companies became strong buyers on the prospect of a range-bound market and further declines in volatility. Buying was centered in 30-year currents and 15s. Over the Wednesday-to-Wednesday period, spreads on 30-year FNMA 6s through 7s tightened four to five basis points versus one to two basis points for higher coupons. Spreads in 15-year MBS were firmer by four to eight basis points.

In its Thursday morning market comments, Lehman cautioned that while the environment favors the carry trade, they believe further spread tightening in 30s from these levels could be difficult. Salomon Smith Barney added that 15-year supply has been nearly non-existent and as a result rolls are well over carry. It recommends investors take advantage of this and the bank is a better buyer of 15s against 30s. It appears investors were taking advantage of this on Thursday as the sector was slightly outperforming 30s.

Mortgage market indices

As expected, Freddie Mac reported that mortgage rates declined for the third week in a row for the week ending April 19. The 30-year fixed-rate mortgage rate fell five basis points to 6.94%. This is the lowest it's been since March 7. The 15-year fixed mortgage rate was down seven basis points to 6.42%, and the one-year ARM rate was report at 4.95% from 5.00%.

Despite rates holding below 7%, the Mortgage Banker Association's Refi Index has been slow to respond. In its weekly Mortgage Application Survey released on Wednesday, they noted the Refi Index rose just 3% to 1246 while the Purchase Index gained 1% to 337. In comments, Salomon Smith Barney said it is surprising that refi activity hasn't picked up more. They said that the index was on a pace that could make April the slowest month in terms of average refinancing activity since 2000. At the moment, the only explanation it can come up with to the poor response is that mortgage lenders are focusing on the seasonal pick-up in purchase activity and so don't need to solicit refi business.

Lehman said it would be adjusting its May prepayment expectations lower as a result. Currently, it has 7s and lower declining 20-30% and higher coupons 10-15%.

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