Mortgages experienced aggressive buying following the on-target employment report that continued into Wednesday's trading session. Mortgage performance was also helped by a decline in volatility as interest rates rose. Over the Thursday-through-Wednesday period, mortgage spreads were one basis point wider in 30-year Fannie Mae 4.5s and 5s; one basis point tighter in 5.5s; and four to five basis points better in 6s and 6.5s. In 15s, spreads were flat to one basis point firmer in 4s through 5s, and in three basis points for 5.5s.
While mortgages performed well last week, most coupons are expected to continue doing well over the short term, due to limited supply and attractive carry.
Mortgage application activity rises modestly
Mortgage application activity increased, as expected, as mortgage rates hit a five-month low for the week ending Sept. 3. According to the Mortgage Bankers Association (MBA), the Purchase Index rose 7% to 476, while the Refinancing Index was up 8% to 1949. As a percentage of total application activity, refinancings were 41.4% versus 40.7% in the previous report. ARM share, meanwhile, slipped to 32.9% from 33.1%.
Slight increase in mortgage rates
Mortgage rates rose modestly in response to the sell-off following the August employment report. The 30-year fixed rate mortgage rate averaged 5.83%, up six basis points from the previous week, according to Freddie Mac's latest survey of mortgage rates for the week ending Sept. 10. This was the sixth straight week the rate has held below 6%. The 15-year fixed rate gained seven basis points to 5.22%, and the one-year ARM was reported at 4.00% versus 3.97% previously.
With the increase in interest rates, JPMorgan Securities anticipates application activity to slow in this week's report to and index in the 1800 area from 1949.
August prepayment reports uneventful
Prepayments for August on both Fannie Mae and Ginnie Mae MBS were mostly in-line with to slightly lower than consensus expectations. Overall, speeds rose in August as mortgage rates dipped in July. With regard to the Fannie Mae report, JPMorgan reports signs of burnout were showing up in the seasoned premiums. Analysts expect the trend to continue next month "reflecting relatively low reactivity in the Refinancing Index." Also, prepayments on 2003 vintage 5s continue to remain firm. JPMorgan expects them to hold above 10% CPR for at least two more months.
Ginnies continue to prepay faster than conventionals. This has been attributed to the lower credit quality of the underlying borrowers that has resulted in servicer buyouts, and home price appreciation that has resulted in refinancing into more favorable conventionals.
JPMorgan analysts added that paydowns totaled approximately $55 billion, an 8% increase over July. Net fixed rate issuance was a negative $5 billion. They expect paydowns in the September report to increase to $60 billion as a result of further declines in mortgage rates leading to higher prepayments.
Looking ahead to the September report, Bear Stearns senior managing director Dale Westhoff said he expects most of the impact from the decline in mortgage rates in July and August to flow through to September's numbers. Currently, JPMorgan anticipates 2003 5.5s to prepay at 19% CPR; 2003 6s at 30% CPR; and 2002 6.5s at 40% CPR.
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