Flows in mortgages last week were mixed. Prior to the Federal Open Market Committee announcement, the sector experienced better selling from originators and money managers.

Fifteen-year MBS made up about 30% of mortgage banker supply, while the remainder consisted mostly of 30-year 6.5s. On Thursday, the sector saw better buying due to the spread widening from money managers, and month-end extension buying from index players.

According to Lehman Brothers, the U.S. MBS Index gained 0.18-years, about twice the norm. From Wednesday-to-Wednesday, spreads in 30-year paper tightened an average of 11 basis points, and in GNMA and conventional 15s, they were 6 and 9 basis points richer, respectively.

Last Wednesday, the Mortgage Bankers Association announced that its Refi Index fell 36% to 1763 on a seasonally adjusted basis, nearly wiping out last week's increase. Unadjusted, the index was down 43%. As a percentage of total applications, refinancings were 50.3%, down from 59.9% in the previous week.

The Purchase Index also fell, 12% to a seasonally adjusted 329; unadjusted the index was 15% lower. In comments regarding the recent mortgage application activity, Lehman noted that the decline in mortgage applications came on very little change in mortgage rates from the previous week. As a result, they caution that the week-to-week movements in these numbers can be unreliable. They also suggested that reporting problems are responsible for the see-saw pattern seen in the Refi Index over the past two weeks.

Looking ahead to this week's report, Salomon Smith Barney expects the Refi Index to increase due to a dip in mortgage rates.

On Thursday, Freddie Mac reported that mortgage rates were slightly higher on the week. The national average 30-year rate rose six basis points to 7.02%, the highest in three weeks, and 15-year rates were up seven basis points to 6.51%. The one-year ARM rate was 5.12% versus 5.10% the week prior.

Prepayment Outlook

This Thursday, February 7, the housing agencies release prepayment reports for the month of January. As the table below illustrates, speeds are expected to be down sharply, though there is a difference in their degree. Depending on how large the slowing is in January, this will influence how much of a decline might be seen in February. Looking ahead to March, speeds are expected to increase modestly, especially in the premium coupons.

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