Last week, mortgage activity was rather lethargic. Given the previous week's run-up, investors and analysts turned more neutral, though with a positive tilt due to the attractive carry. Flows were generally two-way and consisted of moving down in coupon. There was continued selling by servicers in 5s and increased interest by a variety of investors in 15-years due to recent underperformance versus 30s as well as better fundamentals and technicals. Originator selling was nearly nonexistent, averaging about $750 million per day.

Over the week, spreads were slightly tighter with the exception of both 30- and 15-year 5.5s, which were flat to wider. Meanwhile, 30-year Fannie Mae 4.5s, and 15-year 4s and 4.5s tightened three basis points.

FNMA portfolio growth nearly positive

Fannie Mae reported in its April Monthly Summary that mortgage portfolio growth was negative 0.6%. Initial thoughts were that the GSEs would start becoming better buyers, especially with the recent widening. This appears less the case, following the dramatic improvement in spreads over the weeks on strong buying and a steady grind tighter last week. Current OAS's, said analysts at Bear Stearns, puts them back in the mode to shrink. If spreads continue to tighten, "the month of May could be the only one for a while with net portfolio growth," they said. In addition, politics are also pushing the GSEs to the sidelines, said Bear.

Mortgage application activity slows

For the week ending May 14, the Mortgage Bankers Association (MBA) reported a decline in mortgage application activity. The Purchase Index slipped 8% to 454, while the Refi Index was down 17% to 1817. As a percentage of total activity, refinancings were 37.4% versus 39.4% in the previous week. ARM share, meanwhile, rose to 35.2% from 34.8%.

Freddie Mac reported slight declines in fixed-rate mortgages for the week ending May 21. This was expected given the rally that started on Friday, May

14, which continued through Monday, May 17. This had the 10-year yield 17 basis points lower from the previous Thursday's close. Since then, rates have held in a

narrow range.

For the record, the 30-year fixed-rate mortgage rate fell four basis points to 6.30%; and the 15-year was down five basis points to 5.67%. Meanwhile, the one-year ARM rate rose nine basis points to 3.99%.

Looking ahead to this week's MBA mortgage application survey, analysts expect the Refi Index to hold near its current level. The Purchase Index should also hold firm due to seasonal factors, Lehman Brothers said in research.

Near-term outlook in prepayments

With only about 20% of the market exposed to refi incentive, prepayment speeds are expected to decline sharply in the months ahead. There is some controversy, however, regarding 2003 Fannie 5s. JPMorgan expects that, with existing home sales holding strong, speeds on 12 WALA 5s will be faster than many on the Street are predicting. Some analysts are using the 1994 and 2000 periods as guides to future speed expectations, but JPMorgan says this is a poor comparison given the strength of the current housing market versus back then. JPMorgan analysts, in fact, anticipate "speeds on 12 WALA FNMA 5s to be well over 9% CPR in the summer, and likely over 11% CPR, taking into account the rapid seasoning in 03 paper." Consensus currently projects speeds on the vintage to decline to 7% CPR by July.

The table on this page gives the latest consensus projections for certain 30-year Fannie Mae coupons and vintages.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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