Mortgages finally caught a bid last week, finally outperforming agencies after two weeks of steady underperformance following the accord between Rep. Richard Baker (R.-La.) and the GSEs.

Near close last Thursday, the 30-year MBS sector was outperforming by 1.7 ticks. A large west coast fund was reportedly in the market last week selling a good chunk of slight-premium Ginnie Mae bonds, sources said.

The week prior, however, closed with a current coupon Fannie Mae of 180 over the 10-year Treasury, and 85 over the 10-year Fannie benchmark agency bond. Further, last Wednesday mortgage spreads came in seven compared to Treasurys, to 173 over; they came in two basis points compared to benchmark agencies, from 85 to 83 over. And last Thursday, the current coupon tightened in one more basis point, to 172, when agencies didn't move at all.

So, despite heavy mortgage banker selling last week, mortgages finally made a comeback.

Bank CMO bid lists, however, are expected to remain spotty through year-end, sources note, though another $8 billion to $10 billion is expected by December, according to Credit Suisse First Boston.

HUD Lowers Premiums

The Department of Housing and Urban Development recently announced that it would be lowering Federal Housing Administration premiums, beginning Jan. 1, 2001.

Specifically, up-front FHA premiums will fall to 1.5% from 2.25%; the refund schedule for receiving a portion of the up-front premiums for pay offs or refi's will be shortened to five years from seven years; additionally, the 50 basis point annual premium will be cancelled automatically when the LTV improves to 78%.

The effect of these changes is expected to result in a slight increase in Ginnie Mae issuance, and an increase in prepayments beginning next year, especially for issues that are less than seven years old and originated before 2001.

Morgan Stanley Dean Witter notes that the FHA says that 200,000 borrowers will be eligible for a partial refund on their up-front premiums which "could potentially increase prepayments on new premium Ginnie Maes, such as 8s, by 1% constant prepayment rate (CPR) permanently, or possibly 3% CPR temporarily.

In other Ginnie Mae news, the switch to settlement of Ginnie MBS via the Fedwire is expected to be completed by the end of next year. George Anderson, executive vice president for Ginnie Mae, says he expects better and more efficient pricing of both the I and II programs as a result.

He noted the change will allow investors to receive their funds one full business day sooner than currently. He also said that Ginnie Mae plans to introduce multiple-issuer pools for Ginnie I securities early next year.

The Commercial View

On the CMBS front, managing director Brian Lancaster at Bear Stearns was very positive on the market, as it has done very well versus corporates and hasn't suffered from the explosions which have beset the corporate sector.

"Over the next 12 montsh, we might see a rise in delinquency and defaults, but overall, the market is in good shape," Lancaster said. "I am very favorably disposed with the liquidity, and in the last couple of months I've seen investors tending to put more weight on CMBS and less on corporates."

Additionally, Lancaster has seen a major pick-up in originations because of relatively favorable rates, which "will filter through to the market in the early part of 2001."

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