Mortgage applications surged on a seasonally adjusted basis for the week ending May 30, according to the Mortgage Bankers Association (MBA). The Purchase Index jumped 16% to 461 and the Refi Index gained 13% to 9978 - both new record highs. The previous record on the Purchase Index of 416 was set the week ending May 2, and the previous record of 9387 Refi Index set for the week ending March 14.
As a percentage of total applications, refinancing activity fell slightly to 76.7% from 77.1% in the previous week. ARM share activity was also lower at 13.1% versus 13.4%.
The data was influenced by the Memorial Day holiday, which slowed activity due to one less business day. In comments from Lehman Brothers regarding the report, it was noted that the reported number is somewhat sensitive to the day-count adjustment used. The assumption was one day, but assuming a half-day adjustment instead would have pushed the adjusted index below 9000 and a half-day more would have pushed it over 11,000. Given this sensitivity, says Lehman, this week's reading will provide a better indication of the level of application activity, not to mention future prepayment levels.
As expected, mortgage rates set new record lows for the week ending June 6. As reported by Freddie Mac, the 30-year fixed rate mortgage rate fell to 5.26% from 5.31%; the 15-year fixed mortgage rate declined seven basis points to 4.66%; and the one-year ARM rate dipped to 3.59% from 3.63%. At this time, around 85% of the mortgage market is refinanceable, says Citigroup. They also note that conventional 5s with a WAC of about 5.60% are roughly 25 basis points in the money.
MBS spreads weaker on slightly better selling
Current-coupon mortgage spreads were slightly wider over the Wednesday-to-Wednesday period. The 30-year Fannie Mae 5s were two basis points weaker, while 6s were plus seven basis points. Dwarf 4.5s were also two basis points wider while 5s moved out just one basis point. Overall, flows were decidedly two-way with better selling coming from insurance companies and hedge funds, and better buying from banks and money managers. Originator selling, meanwhile, held at between $1 and $2 billion per day. While the two-way flow situation is hurting the technical backdrop, RBS Greenwich Capital says they do not expect to see dramatic underperformance within the sector until carry becomes less dominant.
Despite a new refi wave, Bear Stearns suggests this one may end up supporting mortgage spreads. This is due in part to the shrinking 30-year pass-through market. Thirty-year agency production is expected to decline by over $30 billion in May, which would make it the largest one-month decline on record, according to JPMorgan Securities. The heavy paydowns and refinancings moving into 15-year mortgages and ARMs are accelerating the decline in outstanding 30-years (see related story on p.17). JPMorgan estimates that the amount of outstanding 30-year agency MBS is on pace to drop by more than $200 billion in 2003. This corresponds to more than 10% of the currently outstanding 30-year universe.
At the same time, says Bear Stearns, there is increasing demand from total return portfolios. They note that according to the Investment Company Institute, taxable bond mutual funds have taken in $52 billion in net new cash through April of this year. They estimate about one-third of the total gets allocated to MBS in order to stay in line with the MBS Indexes
The May prepayment report was scheduled for release on Friday, June 6, past ASR's Thursday publication deadline. Consensus was predicting speeds would be little changed from April; however, there is some possibility that speeds may record a slight decline. In comments from JPMorgan, they suggested that the sharp decline in mortgage rates since March when the Refi Index hit its previous record high implies that fallout is extremely likely. They expect that many borrowers will walk away from rate locks in March/April and delay closing on refinancings until June/July. If this is true, than May speeds could be slower than expected. It also implies that mortgage bankers are going to have to buy back the FNMA 5% roll as issuance is pushed to forward months at lower WACs, adds JPMorgan.