After holding essentially un-changed in the previous week, mortgage spreads tightened, especially Ginnie Mae premiums. Sevens and 7.5s firmed 15 and 16 basis points, respectively, over the Wednesday-to-Wednesday period versus five basis points for Fannie Maes.

Overall, spreads moved in eight basis points for 6% coupons; 11 basis points for 6.5s; and 13 basis points for 8s. Fifteen-year MBS spreads tightened eight basis points on average. As noted in last week's MBS Roundup, mortgages tend to benefit following the employment report, quarterly refundings, and the calendar call-out.

Originator supply held at a little over $1 billion per day last week, not much different than in the previous week. It was readily absorbed by banks and money managers. In addition, the sector is benefiting from some corporate crossover buying.

In its Mortgage Strategist publication last week, UBS Warburg noted that the risk-reward profile in mortgages is more attractive than corporates at this time. Specifically, their analysis suggests corporates are about 19 basis points tighter than they should be while mortgages are 23 basis points cheap. According to their report, the average money manager is very overweighted in corporates and neutral to slightly underweighted in mortgages. They expect money managers to reduce some of their corporate overweight and continue to crossover into mortgages. This should help improve the technical position in mortgages which has recently been weakened by slower GSE buying.

April prepayments

Conventional speeds were generally expected to slow 10% or less in April and they did for the most part. The exceptions were primarily 7s, which declined between 15% and 20% for most vintages. CPRs in unseasoned 6s and 6.5s were essentially unchanged at 5% and 12% CPR, respectively. Year-2000 6.5s, however, slowed 18% to 22% CPR.

Speeds on 2001 7.5s fell only 6% to 41% CPR, while 2000 and 1999 vintages were down 12% to 52% and 43% CPR, respectively. In 8s, unseasoned through moderately seasoned vintages declined slightly, continuing to prepay in a range of 45% CPR to 54% CPR. And last, 2000 vintage 8.5s slowed a modest 6% to 55% CPR while 1999 originations were down 22% to 42% CPR from 53% CPR in March.

Ginnie Mae speeds were somewhat surprising, slowing less than corresponding conventionals for currents and discounts. According to Salomon Smith Barney, aggregate GNMA 6s and 6.5s rose 11% and 14%, respectively, versus -5% for FNMAs; 7s slowed 5% versus -11%; while higher coupons recorded similar slowing. Salomon says there was no obvious single explanation for behavior of 6s through 7s, but suggest borrowers switching to conventional loans, cash-out refis, and certain issuers, as some of the reasons.

Looking ahead to the May report, speeds are expected to show further slowing. Lehman Brothers notes that the average level in the Refi Index was 1700 in April and over the past several weeks, it has hovered around the 1400 level. As a result they expect speeds on premiums to come off 2%-5% CPR, while new vintage 6s through 7s are predicted to increase slightly. Speeds in the June report should rebound.

Mortgage indexes

Last week, the Mortgage Bankers Association reported that mortgage applications rose for the week ending May 3 in response to the lower rates. The Refi Index jumped 14% to 1750, and is up 38% from this year's low of 1272 for the week ending March 29. By type, Conventional Refi's increased 12% to 1874, while Government Refi's surged 38% to 1104. As a percentage of total applications, refinancings represented 40.8%, up from 38.7% in the previous release.

The Purchase Index gained another 4% and is now at a new record high of 383. According to Salomon, purchase activity is about 20% higher than a year ago. This translates into a speed increase of roughly one CPR higher they say. Phil Colling, an economist with the MBA said, "Very favorable interest rates, an improving economy, and good consumer confidence are having a positive impact on the U.S. housing industry. In addition, loan applications are being made now for home purchases in June and July, which are traditionally busy months for home purchases."

Mortgage rates did not dip lower as was expected. According to Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed mortgage rate rose one basis point to 6.79%. Firms have suggested that originators are at full capacity which has allowed them to keep rates higher than what would have been suggested by the dramatic drop in rates in April.

The 15-year fixed mortgage rate also gained one basis point to 6.27%, and the one-year ARM rate increased to 4.80% from 4.75%.

At this time, mortgage rates are expected to increase several basis points this week due to the back-up in yields last week.

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