Despite another 3bps drop in 30-year primary rates, the Mortgage Banker’s Association (MBA) Refinancing Index increased to 8840.9 from 8351.1 for the week ending May 23, 2003, which is only a 6% rise from the previous week. This week’s results are short of last week’s projected high-9000 level.
In research this morning, Citigroup said that the Index might have been higher if it were not for the Memorial Day weekend. Because many borrowers might have started their holiday weekend earlier, the Index may be slightly subdued. If a quarter-day adjustment was used, the Index would have increased by 11% to 9306. The main reason for the rise was another dip in mortgage rates. Analysts believe that weekly average rates declined by 10 basis points to 20 basis points.
Despite the rise in applications, the Index (not holiday-adjusted) is still roughly 6% below its March peak of 9387. Meanwhile, the MBA Government Refinancing Index rose almost 20% to 3188, and the Conventional Refinancing Index rose 5.2%. If this trend persists, Citigroup said that Ginnie Mae speeds might experience greater increases versus conventional speeds in the next few months. Citi predicts that next week the Index will likely decline by approximately 15% to 20% because of Memorial Day, if mortgage interest rate stay at current levels.
Last week, Freddie Mac reported that 30-year mortgage rates fell 11 basis points to 5.34%. Kevin Jackson, vice president at RBC Dain Rauscher, said this is the lowest recording in almost 50 years. He anticipates seeing a 10,000 reading on the Refinance Index over the next couple of weeks as the lag effect kicks in.
“A 10,000 reading would imply the fastest prepayment speeds ever seen on agency coupon,” said Jackson. “With mortgage rates at record lows and the MBS application indices on the rise, we suggest buying prepayment protection in any way, shape, or form.”
Attractive bonds in record prepayment environments include low loan balance (85K max loan size), 15-year 5.0% to 5.5%; 30-year 6.0%, and slower paying geographies, such as NY, PR, NJ, TX, FL, HI, AL, MS. LA. Jackson also notes that Dakotas and DUS bonds have good lockout compared to prepayment penalty cash flows.
Meanwhile, JPMorgan Securities maintains its view that the market has yet to see the pick up in refinancing activity suggested by the record low rates. The firm predicts that the Index will break its earlier 9300 high. The MBA also reported that the Purchase Index was unchanged at 395.7.