The week started off slow with limited buying interest; it picked up, however, as the week progressed and supply stalled. Originator selling averaged about $750 million per day, mostly in 30-year 5.5% coupons. Buyers included insurance companies, servicers and especially banks.

Spreads over the Wednesday-to-Wednesday period tightened notably, especially in the higher coupons. Meanwhile, 30-year Fannie Mae 5s strengthened five basis points; 5.5s and 6s were better by eight basis points; and 6.5s firmed 13 basis points. Also, 6.5s have become quite rich in recent weeks. In fact, UBS recommends investors sell Fannie Mae or Ginnie Mae 6.5s and buy a combination of Fannie Mae 5.5s and Trust or structured IOs. In Dwarfs, 4s and 4.5s moved in six and nine basis points, respectively, while 5s and 5.5s were 12 and 16 basis points tighter.

Can the market count on strong bank support?

During the previous quarter, banks were less active in the MBS sector and, so far this quarter, they have not been as active as many expect. This is even as C&I lending remains down despite signs of an improving economy. The combination of MBS and mortgage loans this fall has been flat, according to a recent report from Bear Stearns. In addition, bank deposits have declined, in part due to the improving equity market. Bear says banks have told them they worry about investing in MBS at current low yields with the prospect of rates increasing next year. Bear concludes that "a lack of C&I demand does not necessarily force reinvestment in MBS."

JPMorgan Securities, on the other hand, is a bit more optimistic. They expect spreads to benefit from accelerated demand from banks in the first quarter of next year.

Possibly offsetting less demand from banks may be increased interest from life insurance companies. Standard & Poor's has changed its capital requirements for MBS and corporate bonds. Capital for most MBS have been lowered while corporates have been raised. Bear Stearns analysts suggest that mortgages will have a stronger role to play in life insurance portfolios than they have in the past.

Also supportive of mortgages has been increased interest from money managers covering underweights, and JPMorgan also anticipates that the GSEs may return from their hibernation.

Mortgage applications fall during holiday week

For the week ending Nov. 28, mortgage applications declined as borrowers focused on the Thanksgiving holiday. "As expected, last week was a slow week for mortgage application activity," said Michael Cevarr, the Mortgage Bankers Association's (MBA) manager of member surveys. "After adjusting the mortgage indices for the impact of the Thanksgiving holiday and other seasonal factors, the purchase index was down only 3.9%." The Purchase Index came in at 441.8, while the Refi Index dropped 20% to 2100. On an unadjusted basis, the Purchase Index was off 36% to 253 and the Refi Index plummeted 44% to 1470.

As a percentage of total applications, refinancings were 50% versus 53.3% in the previous survey. ARM share also fell slightly to 26.6% from 27.0%.

Freddie Mac reported a jump in fixed-rate mortgage rates for the week ending Dec. 5. The 30-year rate rose 13 basis points to 6.02% and 15-year rates gained 14 basis points to 5.36%. ARM rates were unchanged at 3.77%. If rates hold at current levels, Lehman Brothers expects the Refi Index to slip towards 2000 in the weeks ahead.

Last Friday, the housing agencies released prepayments for the month of November. In general, consensus predicts speeds on 30-year Fannie Maes to slow 10% to 15% for most coupons and vintages. Speeds are anticipated to pick up slightly in both December and January.

Freddie Mac reports on

Q3 home prices

Freddie Mac announced last Tuesday that its quarterly Conventional Home Price Index rose at an annualized 4.8% during the third quarter (see related story, p. 1). This is little changed from Q2's revised rate of 4.9%. Over the period ranging from 3Q02 through 3Q03, annual home price growth was 5.4% versus 6% for the period 2Q02 through 2Q03.

By region, the Pacific states held their lead for the fifth quarter with an annualized growth rate of 7.2%. The New England states were close behind at 7%, followed by the Middle Atlantic states at 6.4%. The West South Central states were last for the second consecutive quarter, recording a growth rate of 1%. Also reporting lower growth rates - in the 3.4% to 2.4% range - were the Mountain states, East North Central states and East South Central states.

Freddie Mac also noted that it expects the refinance share of originations in 2003 to set a record at 65% (of originations). In 2002, the rate was 59%. Freddie also expects single-family originations to top $3.4 trillion, a new record, and sees a 25% gain over 2002's record.

Last Monday, the Office of Federal Housing Enterprise Oversight (OFHEO) released its quarterly report on home price gains. Average home prices in the U.S. rose 5.61% from 3Q02 through 3Q03, according to the report. The appreciation for the most recent quarter was 1.39%, an annualized rate of 5.56%. MortgageData

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