Originator selling last week averaged nearly $4 billion per day, mostly in 5% coupons, as the market sell-off finally provided originators with an opportunity to sell. Mortgage spreads widened on the supply early in the week as investors showed little interest with yields continuing to rise and volatility increasing. Late in the week, however, investors showed increased interest as the wider spreads drew in a variety of buyers. In addition, there was profit taking noted in 5.5s to move up in coupon.
Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 5s widened 12 basis points, 5.5s were five basis points weaker, and 6s tightened four basis points. In Dwarfs, 4.5% coupons were flat as investors sold 30-year 5s to move into Dwarf 4.5s. Meanwhile, 5% coupons were three basis points wider over the period.
The near-term mortgage outlook has turned neutral to negative. JPMorgan Securities turned negative on conventionals on the risk of potential de-levering from the GSEs. This comes in part by the prospect of accounting losses from the GSEs on their recent buybacks that may require them to take some profits to offset these losses.
It also comes as a result of further potential widening in agency debt with additional headline news associated with the SEC and other government investigations.
Credit Suisse First Boston also warns that a continued rally and curve flattening depresses the carry-advantage of mortgages.
On the flip side, mortgages will benefit from a Fed rate cut as investors turn to MBS for yield opportunities.
Mortgage applications increase slightly
For the week ending June 13, the Mortgage Bankers Association (MBA) reported that mortgage applications were up just slightly from the previous week. The Purchase Index was flat at 419.1 versus 418.9 in the previous report, while the Refi Index increased just 1% to 9163, rising from 9046.9 the week previous. The report is in line with Street expectations.
The increase in the Refi Index followed another 10 basis point dip in mortgage rates, which was significant, said Citigroup in a report released last Wednesday.
At the start of last week, secondary market mortgage rates backed up roughly 15 basis points, reported Citigroup. Primary market mortgage rates are probably going to follow suit shortly. "The rise in rates may convince some homeowners that the time to refinance is running out; consequently, the index may remain near record levels for another week or two," wrote analysts.
As a percentage of total applications, refinancing activity increased to 77.3% from 76.9%. ARM share activity also rose to 14.4% from 14.0%.
Of particular interest in the report is the increasing ARM share. JPMorgan notes that the ARM Index increased to 5477 and is up 11% over the last four weeks. This compares to a 2% gain for the Fixed Rate Index. The ARM share remains at an all time high of 24%, says JPMorgan, and supports continued declines for fixed rate supply.
In terms of type, Citigroup said the government index has been growing more rapidly compared to the conventional index in three of the last four weeks. Analysts stated that this might mean a bigger increase in Ginnie Mae speeds versus conventionals in the next couple of months.
Freddie Mac reported that mortgage rates held steady for the week ending June 20. The 30-year fixed rate mortgage rate was unchanged at 5.21%, while the 15-year fixed rate mortgage rate rose two basis points to 4.62%. Meanwhile, the one-year ARM rate set a new record low at 3.51% versus 3.54% in the previous week.
Looking ahead to this week's mortgage application report, JPMorgan suggests that if the market continues to sell off, the Refinancing Index could top 10,000; otherwise it should hold within the 9000 area.
Kevin Jackson, vice president at RBC Dain Rauscher Inc., echoed JPMorgan's predictions. Jackson said that the Refinancing Index has flirted with the 10,000 mark at least three times since mid-March. "With mortgage rates at half-century lows, we could hit the 10,000 mark very soon as prepayments continue to be robust," he wrote.
Will the June prepayment reportshow dramatic gains?
Over the past four weeks, the Refi Index has averaged 9300, 1000 points higher than the four weeks surrounding the March peak, says Lehman Brothers. At this time, consensus is predicting that 2002 Fannie Mae 5s will prepay at 10% CPR in June, up from 5% CPR. Meanwhile, 2002 6s are also expected to double to 38% CPR; and
6s are predicted to increase to 63% CPR from 46% CPR in May.
Countrywide Securities, however, says June may not see the dramatic increases that have been expected. So far, payoff activity for June is comparable to their experience in May at the same point in time. Further, an analysis that is designed to depict the expected lag between application and payoff suggests that June may wind up flat to slightly faster than May.
In addition, says Countrywide, their analysis suggests that prepayment speeds may not fully reflect the recent surge in refinancing activity until July or August.
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