Last week was a relatively quiet week, volumewise, in the mortgage market as many participants took vacations during the Presidents Day holiday week. Flows were mixed with Tuesday recording better selling as the 10-year yield held below 4.70%. On Wednesday, supportive flows emerged on the stronger-than-expected CPI report that pushed the 10-year yield back above 4.70%. Buying on a ratio of 3 to 1 was reported from money managers and servicers - focused in discounts - while other real money, relative value accounts and dealers were reportedly interested in par and premium coupons.

Treasurys continued to weaken on Thursday with the yield on the 10-year Treasury at 4.724% at midday. This was encouraging widespread buying interest, with buying all over the coupon stack. Overseas buying last week was a pleasant surprise for the markets - being better than expected given that China was in the midst of its New Year's celebrations. Lately, foreign investor buying has been mostly in 5.5%s and 6%s. Originator selling was above average at between $1.5 billion and $2 billion per day. The supply, however, was readily absorbed with the better buying seen midweek.

Mortgages made slight performance gains last week from the previous week with the better buying as well as the downtick in volatility as interest rates backed up.

According to a Lehman Brothers report, the MBS Index was up 15 basis points month-to-date through last Wednesday.

Mortgage outlook

This week should see a pickup in volume as vacationing participants return. In addition, there are a number of key economic releases scheduled, including new and existing home sales, durable goods, the second reading for the fourth-quarter GDP, the Chicago PMI, construction spending and the ISM Index. The employment report, however, will not be released until March 9. In addition, there are a few Federal Reserve speakers, including Fed Chairman Ben Bernanke on Friday.

Current levels and the range-bound market will keep investors more in a "trading" state of mind. Above 4.70% on the 10-year Treasury, MBS are expected to see better buying support. Profit taking tends to pick up on strength that rallies through 4.70%. This week, mortgages also will see some month-end buying support.

Lehman Brothers analysts said in a report that the MBS Index is estimated to extend 0.06-years on March 1. Other sector extensions are 0.21 years for Treasurys due to the refunding; 0.13 years for agencies; 0.08 years for corporates; and 0.11 years for the Aggregate Index.

Mortgage application activity was down 5% overall for the week ending Feb.16. The Mortgage Bankers Association reported that the Refinance Index slipped 5.4% to 1921.1 while the Purchase Index declined nearly 5% to 381.4. During that week, mortgage rates held fairly steady with the 30-year fixed rate up just two basis points from the previous week to 6.30%. Possibly the softness in activity could be related to the bad weather across parts of the country.

Analysts from theMAX (formerly AFS Title Search) pointed out that although application activity has been drifting lower, it remains seasonally strong. Specifically, theMAX stated that attractive mortgage rates have allowed refinancing activity to remain robust or "indicative of mortgagors eager to restructure debt."

As a percent of total applications, refinancings fell to 44.9% from 46.1% in the previous report. ARM share was unchanged at 21.2%.

Mortgage rates lower in latest FHLMC survey

Mortgage rates declined last week in response to the recent market rally. According to Freddie Mac primary mortgage market survey results, the 30-year fixed mortgage rate fell eight basis points to 6.22%. A year ago, the 30-year rate was just slightly higher at 6.26% with the MBA's Refinance Index in the 1570 area.

Meanwhile, 15-year fixed mortgage rates declined to 5.97% from 6.03%. On the adjustable-rate side, five-year hybrid ARM rates declined five basis points to 5.96% and one-year ARM rates slipped three basis points to 5.49%.

"Mortgage rates eased a little more this week as market participants were concerned over how much drag the slowing housing market may have on economic growth," Frank Nothaft, Freddie Mac vice president and chief economist, said in a release. He cited the fact that the housing starts report for January, which was released the previous week, actually reflected the weakest reading since August 1997 because of the abundance of homes already on the market for buying.

Nothaft expects that this week's new and existing home sales reports should provide a more comprehensive picture of the housing market's strength. He also noted this week's release of the second estimate for economic growth in the fourth quarter of last year. This information "should further provide insight into what extent the housing market is affecting the economy," Nothaft said.

Looking ahead to this week's MBA Mortgage Application report, activity is expected to see some slowing related to the Presidents Day holiday.

Prepayment outlook

Speeds are anticipated to slow about 5% in the February prepayment report overall. This is partly a result of the lower day count that went down to 19, versus 21 in January. Partially offsetting the day count factor is an improvement in seasonals seen this month compared with January.

Meanwhile, March speeds are expected to surge 20% on a three-day increase in the number of collection days as well as strengthening seasonals. Looking further ahead, April's lower day count suggests prepayment speeds for this month will slow about 5% compared with the predicted speed levels for March.

Freddie Mac's retained portfolio

Freddie Mac reported 4.4% growth in its retained portfolio in January to $706.2 billion. In December, the GSE reported a 1.2% contraction and an ending balance of $703.6 billion. The current level of the portfolio remains substantially below the level of its agreement with the Office of Federal Housing Enterprise Oversight of over $730 billion.

Patricia Cook, Freddie Mac's executive vice president of investments and capital markets, recently suggested the GSE could use that difference to take advantage of investment opportunities as they occur.

Details show that retained purchases were only slightly changed from December at just under $18 billion. Sales and liquidations totaled $15.4 billion, down slightly from $18.1 billion previously. Net mortgage purchase agreements increased to $18.1 billion from $14.3 billion in December.

Within the retained portfolio, Freddie Mac PCs and structured securities holdings increased $3.4 billion to $357.6 billion. In December, holdings declined nearly $4 billion. Non-Freddie Mac mortgage-related security holdings totaled $282.4 billion, down slightly from $283.5 billion in the last report.

Issuance of PCs and structured securities increased to $36.7 billion in January from $32.7 billion in December. After liquidations, net issuance totaled $18.7 billion, up from $13.3 billion previously.

Delinquency information showed a one basis point increase in December in the single-family non-credit-enhanced category to 25 basis points. There has been steady deterioration in delinquencies since September when the number increased to 23 basis points from 22 basis points. Freddie Mac's duration gap remained at 0 months.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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