Mortgage performance was mixed last week. The sector lagged ahead of new Federal Reserve chairman Ben Bernanke's appearance before the House Financial Services Committee Wednesday on concerns of how his remarks could impact interest rates and the shape of the curve. His remarks, however, provided no shocks and buying picked up Wednesday within minutes of his appearance.
Technicals, meanwhile, continue to be a dominant theme in the mortgage arena. Originator selling remains under $1 billion per day on average with supply focused in 5.5s and 6s. There has been fairly steady demand from domestic investors, both real and fast. Overseas, however, has been a disappointment despite the higher yield levels with limited forays since returning from the week-long Chinese New Year holiday in early February.
The steady down-tick in volatility has been supportive. Outside of technicals, the mortgage landscape is increasingly precarious due to the inverted curve, outlook for continued interest rate hikes and potential inversion of the swaps curve. A move toward 4.7% on the 10-year also increases the risk of servicer selling.
Analysts' outlook
In research last week, analysts were mostly neutral on the sector over the near term as technicals are seen as partially offsetting.
Credit Suisse analysts noted that further inversion of the curve could cause mortgages to underperform, but limiting the underperformance are supportive factors including foreign demand, low volatility and low dealer inventories.
JPMorgan Securities researchers remain tactically neutral for similar reasons and add that with expectations of a slowing economy and housing market, selling prepayment options have become more attractive than credit spread alternatives.
Countrywide Securities analysts are cautious on the mortgage sector as long-term rates increase and the curve remains inverted. They believe this might be an opportunity to reduce exposure to the sector, especially if it appears long rates will break out of their current range.
Lehman Brothers analysts believe it will be hard for mortgages to tighten further. They don't believe the latest prepayment report, and indications of cooling in the housing market can be good news, especially for discounts.
UBS remains positive on the sector as they continue to hold within a fair value range on their model.
Mortgage application activity responds to higher rates
The Mortgage Bankers Association reported mortgage application activity declined 7% overall for the week ending Feb. 10. The Purchase Index was off 8% to 392 and the Refinance Index dropped 6.5% to 1637. The declines were in line with expectations given the recent increases in mortgage rates. As a percentage of total application activity, refinancings were 41.2% versus 42.1%. ARM share was little changed at 29.6% compared to 29.8% previously.
Mortgage rates reported their fourth straight week of increases. Last week, the 30-year fixed rate mortgage averaged 6.28%, up four basis points from the previous week, according to Freddie Mac's weekly survey. Over the past four weeks, mortgage rates are up 18 basis points from a low of 6.1% for this year.
In other lending programs, 15-year fixed mortgages jumped eight basis points to 5.91%; 5/1 hybrid ARMs were up six basis points to 5.95%; and one-year ARMs gained two basis points to 5.36%.
Freddie Mac chief economist Frank Nothaft stated, "So far this year, fixed-rate mortgage rates have risen only slightly."
He added that long-term mortgage rates are only marginally higher versus two months ago. Nothaft also noted that the housing start figures in January came in at the highest level in more than three decades, attributing the significant increase to a combination of low rates and warmer weather across the country.
With the additional increases in mortgage rates, expectations are for application activity to move below 1600 in this week's report.
Prepayment outlook
Early indications regarding the February prepayment outlook show FNMA speeds on 30-year MBS increasing about 10% from January, and GNMAs increasing about 5%. The 30-year fixed mortgage rates influencing the February report are slightly lower versus January's report at an average of 6.15% in January versus 6.27% in December. The Refinance Index was 22% higher in January, averaging 1666 compared to 1371 in the previous month. Partially offsetting is one less collection day in February - 19 days- versus 20 days in January. The March outlook has speeds increasing over 20% on FNMAs and 15% on GNMAs due to improving seasonals and an increase in the day count to 23 days from 19. Speeds in April are predicted to slow due to four less collection days
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