After a lackluster start to April on the limited economic news, activity finally picked up last week - primarily after the release of the Federal Open Market Committee minutes from the March 22 meeting. Investor reaction was positive after reading the committee's comments in regards to inflation and the market rallied. In mortgages, it was primarily fast money that was the most active; however, real money was noted, as were Asian buyers, finally.
Also last Monday was 48-hour notification for 30-year conventionals. Rolls on FNMA 5s and 6s were special. JPMorgan Securities analysts report that they expect the FNMA 5 roll to collapse next month as production in April is over $9 billion and they anticipate another $15 billion in May.
Originator selling, meanwhile, was relatively light with early week sales at $1 billion or less. On Thursday, however, mortgage bankers hit the market with over $1.5 billion that was readily absorbed.
Over the one-week period ending last Wednesday, spreads ranged from five basis points tighter versus U.S. Treasurys for 30-year Fannie Mae 4.5s to one basis point firmer in 6.5s, respectively. In 15s, spreads were in two basis points in 4s and 4.5s and unchanged in 5s.
The current outlook for mortgages remains mixed. The positives are declining fixed rate supply and continuing overseas support. The negatives include a lack of support from Fannie Mae, uncertain support from banks as C&I lending picks up, and tight OAS. Regarding Fannie Mae, the Office of Federal Housing Enterprise Oversight found additional accounting issues related to qualified special purpose entities, raising the risk of potential selling from their retained portfolio. In recent comments, RBS Greenwich Capital estimates this latest issue has a potential $7 billion impact on capital. Analysts say this has ramifications for the MBS market as FNMA may have to liquidate approximately $154 billion of its portfolio.
Mortgage application activity rises modestly
As expected, mortgage application activity increased modestly for the week ending April 8, in response to the decline in mortgage rates. During that week, the 30-year fixed rate mortgage rate fell to 5.93% from 6.04%. The Mortgage Bankers Association reported that the Purchase Index was up 6% to 475, while the Refinance Index gained 5.6% to 1900. As a percentage of total application activity, refinancings were little changed at 38.1% versus 38.3% previously; ARM share was up slightly to 35.8% from 35.2%.
Last week, Freddie Mac reported a modest decline in 30- and 15-year fixed mortgage rates, as well as in 5/1 hybrid ARMs. The 30-year fixed-rate mortgage averaged 5.91% versus 5.93% in the previous week. The 15-year fixed rate and 5/1 hybrid ARM rate were also down two basis points to 5.46% and 5.31%, respectively. Meanwhile, the one-year ARM rate rose seven basis points to 4.30%.
With rates stable to slightly lower, expectations are for the next mortgage application report to show a slight increase in the Refinance Index towards the 2000 area.
April prepayments expected to hold near March levels
Current consensus expectations have speeds on 2004 vintages flat to slightly higher in April versus March, while other coupons and vintages are expected to slow about 5%. Lehman Brothers attributes the limited slowing to increased "pull-through" rates. Analysts believe that many borrowers in March ended up closing on their applications on the sudden increase in mortgage rates beginning in mid-February. They also believe pull-through is a factor that will still have some affect on the April report. (See related story on p.16).
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