Mortgages saw active buying for the first couple of days last week from banks and money managers. The sector also benefited from roll-related trading as 48-hour notification approached. In addition, mortgage bankers have remained limited sellers, which also provided support for the market. Late Wednesday, however, the sector came under pressure when 10-year yields dipped to 4.64% as equities continued to falter. Over the Wednesday-to-Wednesday period, spreads widened one basis point for 30-year Fannie Mae 6s and 6.5s; plus three basis points for 7% coupons; and five basis points weaker in 7.5s. Fifteen-year MBS moved out two to three basis points.
Street analysts are generally neutral on the sector due to increased prepayment risk, and especially on increased supply. UBS Warburg commented, "with mortgages still fully priced to the GSEs, we are unsure who absorbs that supply."
June prepayments
There was nothing surprising in June conventional prepayments. On unseasoned Fannie Mae 6s, 6.5s, and 7s, speeds rose 17% to 7% CPR, 14% CPR, and 27% CPR, respectively. Older vintages were little changed. In 7.5s and 8s, speeds were generally slower. Meanwhile, 7.5s fell 5% for moderately seasoned to 20% for seasoned issues; while 8s slowed 20-30% from May.
In Ginnie Maes, speeds on most coupons and vintages prepaid similar-to-faster than corresponding Fannie Maes. For example, 1998 6s prepaid at 17% CPR for Ginnies versus 15% CPR for Fannies; 2001 and 1998 6.5s prepaid at 14% and 25% CPR, respectively, for Ginnies versus 15% and 22% CPR for Fannies; and 2001 and 1998 7s prepaid at 30% and 33% CPR versus 27% and 28%. UBS Warburg suggests that Ginnies are reacting to rates with a longer lag than conventionals. Bear Stearns adds that GNMA prepayments may also be impacted by servicer buyouts of delinquent FHA loans.
Looking ahead to the July and August reports, Lehman says it expects prepayments to pick up substantially. Noticing that the level of the Mortgage Bankers Association's Refi Index for the July report is 1853, and for August 2312. Bear Stearns also says (in commentary released on July 8) the rally in mortgage rates over the past two weeks will make refinancing more appealing, even to seasoned borrowers. At this time, Bear forecasts 2001 6s to increase to 12% CPR from 8%; 2001 6.5s to 29% CPR from 15%; 2001 7s to 45% CPR from 27%; and 2000 7.5s to 62% CPR from 44%. According to Bear Stearns, 70% of the mortgage market is exposed to refinancing risk at current levels. If rates drop to below 6.5%, they believe significant refi demand will develop.
Mortgage Indexes
For the week ending July 5, the MBA reported that its seasonally adjusted Refi Index was essentially flat at 2617 versus 2633. Expectations were for a strong increase based on the two-day adjustment that the MBA made for the July 4 holiday. Unadjusted, the Refi Index fell 30% to 1832. Refinancing applications as a percentage of total applications was 50.5%, down from 52.6% in the previous release.
Meanwhile, the Purchase Index rose 8% to 408, more than offsetting the previous week's 4% decline. On an unadjusted basis, the Purchase Index dropped 24% to 309.
Rates continue to hold lower, which suggests ongoing support in this week's release. According to the latest Freddie Mac Weekly Mortgage Market Survey, fixed-rates fell 3 basis points. The 30-year rate now stands at 6.54% and the 15-year rate is at 6.00%. One-year ARM rates rose this week to 4.66% from 4.58%.
