For the most part, mortgage activity was steady and two-way last week. At times, the market was weighed by originator selling and profit taking, especially when Treasurys were firm.

However, the spread widening that resulted attracted buyers to take advantage of the continued favorable technicals and fundamentals. Spreads in 30-year Fannie Mae MBS were unchanged in 6s and two-to-four basis points firmer in 6.5s through 7.5s. Fifteen-year 5.5s through 6.5s held within a narrow plus and minus one-basis-point range.

This week, flows will be impacted by 48-hour notification for 30-year conventional MBS on Monday, Feb. 11 and on Thursday, Feb. 14 for 15-year MBS.

January prepayments

On Thursday, Feb. 7, the housing agencies released January prepayment reports. Conventional speeds dropped substantially for 6s through 7s, and were moderate to flat in higher coupons.

Perhaps one of the more soothing aspects of the report was that 2001 vintage coupons declined the most, with 6.5% Fannie Maes down 40% to 11% CPR, 6s down 41% to 4% CPR, and 7s down 31% to 24% CPR. Where the anomalies were revealed was in seasoned issues. On the whole, they had smaller prepayment drops with 1993 6.5s down 4% to 30% CPR and 8% 1992 vintages less than 1% slower. Credit Suisse First Boston noted that the narrowing of speed differences between new and seasoned vintages is because seasoned loans are relatively difficult to process.

Ginnie Maes, on the other hand, declined less than its conventional counterparts. This was not unexpected. Many analysts have noted that Ginnies have lagged because of the longer time to process an application versus conventionals. According to Salomon Smith Barney, speeds on Ginnie 6s declined 15% versus 35% for Fannies; 6.5s were down 8% versus 32%; 7s were off 13% versus 23%; 7.5s slowed 6% versus 13%; and 8s rose 6% versus falling 6% for Fannies.

Speed slowing is attributed to the jump in rates in November and December. Bear Stearns also attributed the slowing in the 2001 vintages to the glut of new issuance in December, which brought speeds lower.

Looking ahead to February, further declines are expected, says Salomon. There are two less business days; however, this will be offset to some degree by a decline in mortgage rates in early January. Speeds are expected to rebound in March.

On Wednesday, Feb. 6, the MBA reported that its Refi Index gained a seasonally adjusted 6.9% to 1884, while its Purchase Index rose 3.5% to 341. Unadjusted, the Refi and Purchase Indexes jumped 19% and 23%, respectively. By type, the Government Index surged 25% on an unadjusted basis to 247, while the Conventional Index gained 19% to 2014. Refinancing activity as a percent of total applications declined to 49.4% from 50.3%.

Last Thursday, Freddie Mac announced that 30-year fixed rates dropped below 7%, as expected. Specifically, the 30-year rate declined 14 basis points to 6.88%, the 15-year fixed mortgage rate fell 15 basis points, and the 1-year ARM reported in at 5.00% versus 5.12% last week. With the decline in rates, the MBA's Refi Index is expected to show further gains next week.

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