Mortgage activity last week was modest, two-ways and mostly up-in-coupon. Real money, including overseas and fast money, were primarily buyers of 5.5s. Meanwhile, 6s also saw good support from certain bank buyers. Originator selling fell back to around its $1 billion average daily level; however, supply turned more balanced between 5s and 5.5s.
The FNMA 5 roll dropped to carry last week during settlement and is looking to be an old story for now. In their mid-week comments, JPMorgan Securities analysts said they expect FNMA 5 supply to exceed $45 billion in the July through September period. Given the heavy supply, they don't expect any improvement in the roll over the near term.
Analyst sentiment was generally neutral last week, With little economic data, and valuations still considered rich. Some positives include mild volatility and a balanced convexity profile, researchers from Deutsche Bank Securities reported. Additionally, technicals remain favorable and there is the added potential support from regional banks. So the underlying story in the mortgage market is little changed: sell on strength and add on weakness.
Application activity declines in latest survey
Mortgage application activity declined for the week ending July 8 - not unexpectedly given the Independence day break and the move higher in mortgage rates. The Mortgage Bankers Association reported that the Refinance Index declined 8% to 2554 in line with expectations from Lehman Brothers and JPMorgan. Countrywide Securities anticipated that it might hold steady at around the 2700 area. The Purchase Index also declined by 6% to 489. Again, Countrywide saw first purchase activity actually increase over 8% during that week.
As a percentage of total application activity, refinancings slipped to 45.1% from 45.7%. ARM share was also down to 27.9% from 30.7% and is at its lowest level since March 2004, said the MBA. JPMorgan analysts add that the drop in ARM share has been rather sudden and suggests that borrowers are refinancing into fixed rate loans from ARMs. This is certainly not positive for the basis, said analysts, with fixed net supply on the rise, and limited support from banks and the GSEs.
30-year fixed rate mortgage rate reports at 5.66%
Mortgage rates were mostly higher in Freddie Mac's weekly survey. Last week, the 30-year fixed rate was four basis points higher at 5.66% and is at its highest level since mid-May. Meanwhile, 15-year fixed mortgage rates averaged 5.25%, up five basis points from the previous report. The ARM report was mixed with 5/1 hybrids declining four basis points to 5.15%, while the one-year ARM rate gained six basis points to 4.39%. Interest rates for 30-year fixed-rate. mortgages are currently at levels seen in mid-May, although less than January's monthly average.
Freddie Mac's Chief Economist Frank Nothaft commented that on a historical basis, "today's rates appear to be quite attractive and should continue to support a vibrant housing market." Nothaft also noted that since Freddie started tracking the 30-year mortgage rate in 1971, it has averaged 9.4%while averaging only 6.5% since 2000.
With the recent increases in mortgage rates, expectations are for the Refinance Index to decline 5% to 10% in this week's MBA report.
Prepayment outlook
July prepayment speeds are expected to be up just modestly, around 5%. While refinancing activity impacting the report is higher versus the June report, day count is lower at 20 days compared to 22 days in June. The August outlook currently anticipates speeds to increase around 10% for 5.5% and 6% coupons, while other coupons are predicted to increase between 6% and 8%. Looking further out to September, speeds are expected to decline slightly.
Discount speeds, in particular, are expected to continue to prepay rapidly in the near term. JPMorgan analysts believe that existing home sales and the lack of a lock-in are primarily driving current discount speeds, adding that as long as 30-year 4.5s remain in-the-money to hybrids, very little lock-in should exist in the 30-year sector, thus keeping speeds elevated.
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