As 15-year mortgages have become a popular choice for refinancing borrowers, the proportion of 15-year supply recently outstripped the 30-year sector.
Since the start of this round of refinancing, the share of 30-year fixed-rate has declined by $68 billion. On the other hand, the 15-year share has increased by $48 billion, according to a recent report by JPMorgan Securities.
"The mortgage market is in a phase of rapid redistribution from 30- to 15-year (and ARM) collateral," wrote David Montano, head of mortgage research at JPMorgan. "As 30-year fixed rates have historically been the most liquid sector with the greatest activity and sponsorship, the current supply trend will likely favor the performance of 30-year collateral over 15-years."
This may, however, cause liquidity in the 30-year sector to be negatively impacted, he said. For instance, Montano cited the fact that supply in FNMA 5.5s - roughly $32 billion last month - was actually comparable to 15-year 5s (which was approximately $27 billion in November). He also mentioned that CMO issuance has mostly been in the 30-year sector. This would imply that tradable float is probably smaller in the 30-year supply coupon compared to the 15-year current coupon.
Montano stated that the rolls in both coupons are special. "The 30-/15-year current coupon spread is 69 basis points, which is a standard deviation cheap given the curve and volatility," he explained. "It looks particularly attractive given that the spread has rarely been above 70 basis points (even with steeper curve environments) and the supply in 15-years has never been greater."
Countrywide Securities analysts cited November conventional net production figures - which increased to $12.1 billion - in a recent report. They also noted the significant disparity between 30-year and 15-year net production.
The dramatic growth in net production was hidden by the fact that there continues to be negative net production in the 30-year sector, said Countrywide analysts. They added that 30-year net conventional production was negative $7.6 billion, which would be the fourth straight month of negative net 30-year production.
On the other hand, analysts stated that net 15-year production shot up to $19.8 billion, which is the most it has been since last December. "What's notable about this number is that for December 2001, 30-year net supply was $20 billion," wrote analysts. "This shift in production dynamics was driven largely by changes in gross issuance and prepayment speeds."
They said that overall 15-year prepayments speeds were considerably slower than those of 30-years. Overall CPRs of 30-year Fannies was 48.7%, while it was 50.9% for 30-year Golds. This is compared to 15-year passthroughs, where overall speeds were 35.8% for Fannies and 36.6% for Golds.
Researchers also noted that 15-year conventional issuance rose as a proportion of total conventional production. To illustrate, 15-year gross issuance comprised 31% of conventional production last month. As recently as last July, 15-years made up just 21% of conventional issuance, analysts said.
Analysts cited three main factors for this growth in the 15-year share of conventional production. For one, 30-year borrowers can refinance into a 15-year mortgage to shorten their loan term while holding monthly payments roughly the same. Also, refinancings out of fixed-rates into ARMs are mostly done out of 30-year loans. Banks as well as depositories retain considerable amounts of 30-year production in their portfolios.
"Among other factors, this development suggests that the technicals in the 30-year market are much healthier than in the 15-year sector," wrote Countrywide analysts. "All things being equal, we expect the performance of 15-years to lag relative to that of 30-years, as we go into year-end, as reinvestment of paydowns continues to act as a major driver of account activity and valuations."