Last week's mortgage activity was mixed. Originator supply averaged $1.5 billion, less than the $3 billion per day that was expected. At the same time, episodes of widening - from supply or the FOMC surprise - attracted a variety of buyers. Traders noted support coming from banks, money managers, CMO dealers, servicers and arb accounts. Banks were focused in 30-year 5.5s and 6s, as well as 15-year 4.5s and 5s, while money managers continued moving up-in-coupon as a result of carry. There was also some month-end extension buying seen early in the week. Most of that activity, however, was expected to show up last Friday.

Duration extensions for January are fairly minimal for mortgages as prepayments slowed. Lehman Brothers expects the MBS Index to extend 0.10 years. The Agency Index is also forecast to extend 0.10 years. Meanwhile, the Treasury Index is estimated to show no extension for the second month in a row, while the U.S. Credit Index increased 0.06 years. Overall, the Aggregate Index is set to

extend 0.07 years in January, Lehman says.

Going into Wednesday's FOMC announcement, JPMorgan Securities upgraded its MBS recommendation to positive from neutral. The improvement was due to the recent supply-induced widening. UBS also moved to a slight overweight from neutral, for the following reasons - the current coupon mortgage is only four basis points rich; the market was able to easily absorb recent supply with limited cheapening, suggesting support from other sources beside banks; and the range trade appears to be firmly in place and mortgage carry is too good to ignore. Finally, Countrywide Securities is neutral to positive compared to negative to neutral for the previous week. Countrywide said the recent backup in rates made the firm more comfortable with the mortgage basis.

Over the past week, spreads on 30-year Fannie Mae 5s and 5.5s widened five basis points and three basis points, respectively. Meanwhile, 6s moved out just one basis point, while 6.5s were three basis points cheaper. Dwarfs were better with 4.5s one basis point weaker, 5s unchanged and 5.5s three basis points tighter.

Mortgage application

activity slips

Mortgage application activity dipped for the week ending Jan. 23, according to the Mortgage Bankers Association's (MBA) weekly survey. This was a big surprise since many analysts expected a print nearer to 4000. The Purchase Index fell 10% to 452 on a seasonally adjusted basis, and the Refi Index was off 1% to 3297. On an unadjusted basis, the Purchase Index declined 14% to 362, while the Refi Index slowed 11% to 2967. Citigroup Global Markets was not surprised that the Refi Index held steady because mortgage rates were little changed week over week.

As a percentage of total applications, refinancings were 58.5% versus 57.7% in the previous report. ARM share fell to 26.3% from 27.8%. Lehman says it expects the Refi Index to decline toward 3000 in coming weeks.

Slight increase in

mortgage rates

Freddie Mac reported small gains in mortgage rates for the week ending Jan. 30. The 30-year fixed-rate mortgage rate averaged

5.68%, up four basis points from last week. Analysts were predicting the 30-year rate to come in at around 5.70%. The 15-year fixed-rate mortgage rate went up two basis points to 4.97%. Lastly,

the one-year ARM rate reported

in at 3.59% versus 3.56%


Currently, Bear Stearns calculates that about 50% of the mortgage market has refinancing exposure. This equates to $1.5 trillion. Analysts believe the first important rate threshold occurs between a 5.5% and 5.4% primary mortgage rate, which pushes the 5.5% coupon into the refi window. At that point, refi exposure increases to 71% and $2.1 trillion. All in all, this

situation doesn't seem to be

likely. Still, the latest drop in

mortgage rates has raised February and March prepayment


Lawmakers, OFHEO keep heat on Freddie Mac

At a U.S. House Energy and Commerce Subcommittee hearing last Wednesday, lawmakers called for Freddie Mac to register its stock and debt under federal securities laws. Office of Federal Housing Enterprise Oversight (OFHEO) Director Armando Falcon, Jr. also said he would take action if Congress does not enact legislation requiring registration. Fannie Mae and Freddie Mac agreed in July 2002 to voluntarily comply with the Securities and Exchange Act of 1933. However, only Fannie Mae has registered. Freddie expects to register next year.

OFHEO announced last Thursday that until Freddie Mac brings its financial statements up to date, it is imposing a 30% surcharge against the GSE's capital. In addition, Freddie must seek pre-approval for certain transactions until it is current. Freddie Mac Chairman and CEO Richard Syron said that Freddie is well capitalized. Also, OFHEO noted that Freddie had more than enough in surplus capital to cover the surcharge. OFHEO said it would monitor Freddie's capital position on a weekly basis.

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