Since rates began rallying Thursday, Jan. 10, mortgages have been under pressure from investor selling to protect profits, as well as mortgage banker supply.

According to Lehman Brothers, the mortgage sector has given up most of its gains made since the beginning of the year. Originator supply totaled over $6 billion during the week, while bid lists of MBS and structured product peppered the market.

Offsetting some of the supply was opportunistic buying on the wider spreads from money managers, banks, and insurance companies. Spreads moved out about five to seven basis points on the wings, and were one basis point weaker in 7s and 7.5s over the week.

Prepayment outlook

From the start of the year, 10-year yields are down around 34 basis points. This latest rally, says Credit Suisse First Boston, makes a renewal of strong refinancing activity likely. If this starts to show up in the MBA Mortgage Application Survey, it may be that speeds will slow less than expected which certainly puts off extension risk worries.

Looking to January, speeds are predicted to slow. Salomon Smith Barney expects speeds to decline around 20% with deeper in-the-money high premiums and seasoned collateral exhibiting smaller declines.

Lehman expects stronger slowing of around 30-40% in Fannie Mae MBS. They predict February declines to be more modest at 15-20% with March showing modest gains of 10-20%. UBS Warburg estimates slowing of 30-40% in 7% coupons and lower, and 15-20% in higher coupons in January. They expect most coupons and vintages to slow an additional 10-20% in February, and increase 10-20% in March.

MBA's Refi Index

climbing as rates drop

On Wednesday, January 16, the MBA announced its seasonally adjusted Refi Index rose 14% to 1938; however, unadjusted, the index soared 90%. In comments from its MBS Week, Countrywide Securities suggested that the holiday adjustment in the previous report was overstated and, as a result, would mask the increase in activity experienced. Therefore, Countrywide feels the unadjusted Refi Index better reflects the recent pop in applications volume.

The seasonally adjusted Purchase Index fell 7% to 349; unadjusted, however, the index jumped 62% to 281. In comments from the previous report, Salomon had suggested that the holiday factor was overstated.

As a percentage of total applications, refinancings were 54.3% compared to 50.3% in the previous survey.

Looking ahead to this week's Refi number, Salomon says that most of the recent rally was not captured in last week's report. Based on the current level of mortgage rates, they expect the index to move well into the 2000s.

On Thursday, Freddie Mac reported that 30-year mortgage rates dropped 23 basis points to 6.83%; 15-year mortgage rates declined 24 basis points to 6.31%; and one-year ARM rates fell to 5.08% from 5.26%. When 30-year mortgage rates were last near current levels, the MBA's Refi Index stood at 2700.

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