Through Thursday of last week, mortgage activity was relatively quiet compared to trading sessions earlier in the month, which saw periods of heavy originator selling, offset by active buying from most account types.

The last week of November experienced modest originator selling of $1 billion or less per day. At the same time, investors were better sellers, particularly money managers, who took profits and in some cases moved up-in-coupon. There was modest buying interest from arb accounts and insurance companies.

Banks, however, were fairly quiet, though they are not out-of-the-game. With rates substantially higher, mortgage bankers were seen buying back mortgages as they expect forward supply in certain coupons to be less than originally projected. Friday, index players were expected on month-end extension trades. Lehman's MBS Index will extend 0.07 years in November.

Refi Index declines only modestly ...

The MBA announced that its Refi Index declined just 14% to a seasonally adjusted 4284 for the week ending November 23. In addition, refinancing applications as a percent of total applications held strong at 72.9% versus 76.6% in the previous week. The MBA noted that this was the eighth consecutive week that refinancing activity was over 70%.

With rates up dramatically in the past few weeks, the limited decline in the index was somewhat surprising. It is attributed to fence sitters reacting to the increase in rates by filing applications before rates move even higher.

The lower rates sent the Purchase Index up for the second week in a row. The index rose 10% to 324.

...But fixed-rate mortgage rates jump

Freddie Mac announced on Thursday, November 29, that 30-year fixed rate mortgage rates soared 27 basis points to 7.02%. The last time the 30-year mortgage rate was 7% or higher was in early August. 15-year fixed rate mortgages surged 29 basis points to 6.53%, while 1-year ARM rates increased slightly to 5.22% from 5.18%.

The current level of mortgage rates suggest that the Refi Index should experience large declines to the 2000-3000 area in the coming weeks. Lehman points out that for the first half of the year, mortgage rates averaged 7.15% and the Refi Index 2000. This level is still relatively high on an historical basis and suggests that while prepayments will slow, they will remain relatively strong for awhile.

Prepayment outlook

On Friday, December 7, the housing agencies release their respective prepayment reports covering the month of November. Speeds are expected to show strong percentage gains again.

With the back-up in rates in November, most vintages are expected to peak in the January report, though new production could peak in December. In addition, most on the Street have revised slightly lower their peak estimates based on the dramatic gain in rates. Following peaks, the Street is estimating speeds to fall off 10% to over 30% in the February report.

Fannie Mae, Freddie Mac raise purchase limits

The GSEs announced on Wednesday that they were increasing the single-family mortgage loan limit from $275,000 to $300,700, a 9.3% gain. The increase is based on the growth in the national average home price between October 2000 and October 2001.

The GSEs estimate the increase will allow between 220,000 and 250,000 more families to take advantage of a lower cost agency mortgage. Savings are estimated to range from $27,000 to $37,000 over the life of a 30-year mortgage.

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