The mortgage market was not too active last week, as rich valuations and the wait for Friday's non-farm payrolls report stalled activity. Flows, however, were two-way. Originator selling averaged about $1 billion per day and was offset primarily by support from banks, insurance companies and hedge funds.

The big story of the week was the squeeze in Ginnie Mae MBS. The sector gained from a dearth of supply and strong CMO demand. Supply is expected to pick up as conventional settlement closes in. JPMorgan Securities expects Ginnie CMOs to reach $10 billion for November, mostly in GNMA II 5.5s.

Over the Thursday-to-Thursday period, spreads on 30-year Fannie Mae 5s and 5.5s were two basis points wider, while 6s and 6.5s were one basis point tighter. Meanwhile, 30-year GNMA IIs were one basis point firmer in 5% coupons, and four to five basis points better in 5.5s through 6.5s. Also, 15s lagged with spreads two to three basis points weaker in 4.5% and 5% coupons.

How long will banks support mortgages?

The technical story in MBS was strengthened in October as banks finally started showing a strong buying presence. With the economy showing signs of improvement, there is the prospect of increased loan demand. This means banks would invest less in MBS. The Fed Senior Loan Officer Survey released last week showed that while there has been some ease in lending standards during the third quarter, demand for consumer loans weakened. According to the Fed, "lending standards were basically unchanged over the past three months for all types of loans." The previous survey had noted some tightening. The survey said conditions were somewhat improved for business lending demand and that "deterioration in demand from commercial borrowers has slowed and shows signs of stabilizing." The results of the report suggest that bank demand for MBS is likely to remain strong for a while longer.

Purchase Index jumps in latest survey

Mortgage applications were higher for the week ending Oct. 31 as borrowers responded to the decline in rates below 6.00%. According to the Mortgage Bankers Association (MBA), the Purchase Index gained 11% to 404, while the Refi Index was essentially flat at 2319 versus 2312 in the previous report. Analysts had anticipated that refinancings would be little changed. As a percentage of total application activity, refinancings were 51.1% versus 53.3% in the previous report. ARM share fell to 25.4% from 26.5%.

According to Freddie Mac's latest mortgage rate survey, rates were barely changed from the previous week's report. For the week ending Nov. 7, the 30-year fixed rate mortgage rate increased four basis points to 5.98%, while the 15-year fixed rate was five basis points higher to 5.31%. Meanwhile, the one-year ARM rate slipped one basis point to 3.73%.

With mortgage rates holding below 6%, analysts expect this week's mortgage application report to show the Refi Index remaining in the low-2000 area.

Prepayment Outlook

Last Friday, the housing agencies released their prepayment reports for the month of October. As of press time Thursday, speeds were expected to show further declines, with 6.5s and lower showing the most response to the higher rates in September. For example, Fannie Mae 2002 5.5s are expected to slow 28% to 19% CPR, 2002 6s to 39% CPR (a 21% decline); 2002 6.5s to 55% CPR from 62% CPR; and 2002 7s are predicted to prepay 7% slower to 56% CPR.

FHLMC says cash-outs remain unchanged

According to Freddie Mac, 32% of FHLMC-owned loans that were refinanced in 3Q03 resulted in new mortgages that were at least 5% higher than the original loan amounts. This is unchanged from the second quarter, and down from 44% for 3Q02.

Freddie Mac's survey noted that the median ratio of old-to-new interest rates was 1.29. That is, at least half of those who paid off their original loan took out a new one that had a rate that was 29% lower than the old rate. Also, over the 3Q period, homeowners who refinanced their mortgages lowered their rate on average 1.3 %. For a $140,000 loan, the lower rate saves $120 per month, for an annual savings of $1,400, says Freddie Mac.

For the first nine months of this year, homeowners who refinanced took out an additional $95 billion in cash.

The survey reported that properties refinanced during the third quarter experienced a median house-price appreciation of 3% during the time since the original loan was made. This is the same as 2Q03, but is down from 13% for loans refinanced during the same period a year ago.

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