Mortgage spreads moved tighter over the Wednesday-to-Wednesday period. For example, 30-year Fannie Mae discount and cusp coupons moved in two to four basis points while 7.5s and 8s were in 12 basis points and eight basis points, respectively. In 15s, spreads were tighter by one to two basis points in 5.5s through 6.5s, and five basis points in 7s. The tightening came on the back of strong buying from money managers, arb accounts, banks and insurance companies. At the same time, originator selling was fairly strong last week at over $5 billion; however, it was easily absorbed.
While the MBS sector is considered to be a tad rich, other factors continue to favor overweighting the sector. These include excellent carry, declining volatility, a rangebound market, declining supply amidst strong demand, the CMO bid, ongoing credit issues in the corporate sector that is encouraging cross-over buying, and the need to reinvest the high level of paydowns.
February prepayment review
Prepayment speeds generally declined in-line with expectations for Fannie Mae conventionals in February. By coupon, 6.5s slowed 10-15% across the board; however, for 7s through 8.5s speeds on 2000 and 2001 vintages declined 8% and less while most older vintages fell between 10% and 20%. Lehman Brothers noted that the smallish decline in unseasoned premiums was a bit of a surprise as mortgage rates had increased by 16 basis points and the lower day-count for February should have caused prepayments to be about 10% slower.
Ginnie Maes generally recorded less slowing versus Fannies with the exception of 6.5s and 7.5s where it was similar. According to Salomon Smith Barney, Ginnie 6s rose 1% on aggregate while Fannies declined 15%; 7s slowed just 8% versus 15% for Fannies; 8s fell 15% versus 8% and 8.5s declined 13% for Ginnies versus 6% for Fannies. Salomon suggests that the higher decline in Ginnie Mae premiums versus conventionals may be due to mortgage pipeline constraints where lenders processed conventional loans first before turning their attention to FHA and VA loans.
Looking ahead to March, Salomon predicts prepayment speeds to be modestly higher based on increasing seasonals along with an increase in the day-count and low mortgage rates.
The Mortgage Bankers Association announced gains in its Purchase and Refi Indexes for the week ending March 1. This is somewhat surprising as analysts were expecting the Refi Index to be little changed to slightly lower. Apparently, the low rates combined with some back up encouraged the activity on fears that rates would continue to rise. Salomon also suggests the increase may be related to too low an adjustment factor for the President's Day holiday.
According to the MBA, the Refi Index jumped 22% to 2352 on a seasonally adjusted basis; unadjusted, the index surged 36%. By type, conventional refi's gained 22% to 2538 and government refi's rose 23% to 1380. As a percentage of total applications, refinancings were 51.7% versus 48.6% in the previous week. The Purchase Index was up 6% to 3354 on a seasonally adjusted basis.
For the week ending March 8, Freddie Mac announced that 30-year fixed mortgage rates rose seven basis points to 6.87%, 15-year fixed mortgage rates were up nine basis points to 6.37%, and the one-year ARM rate increased to 5.07% from 4.94%.
Looking ahead to this week, Salomon notes that with the back up in rates, they expect the Refi Index could come back down to the 2000 area.