Through midweek, MBS volume was running close to average in mostly supportive flows. Monday started off rather quiet with mortgages weakening on profit taking, following its recent strong gains.
Contributing to the silence were various holidays around the globe. Tuesday opened with further spread weakness following the release of Fannie Mae's substantial first quarter earnings loss. However, it quickly turned around as real and fast money and overseas buyers emerged. Interest was focused primarily in the belly of the stack. Wednesday saw support from reinvestment of April paydowns totaling over $58 billion. Noted specifically was buying from servicers and real money with flows directed up in coupon following the slower than expected prepayment news.
In other mortgage related activity, 15s underperformed 30s through midweek, specified trading was quiet, rolls were mixed though they were expected to firm into Class A pool allocation on Friday, and GNMA/FNMA swaps were little changed. Originator selling was mediocre, averaging just over $1 billion per day in the first part of the week. Supply was primarily in 5.5s.
Mortgages are off to a good start in May. Lehman Brothers reported that the MBS Index is up 30 basis points versus Treasurys. This compares with 13 basis points month-to-date for ABS, 71 basis points for CMBS, and 38 basis points for U.S. Credit.
Mortgage Outlook
Mortgage analysts remained neutral to positive on the mortgage basis last week. Lehman analysts, for example, were neutral, noting that the supply/demand imbalance is counteracted by risks to the upside.
JPMorgan Securities analysts continued to be positive on mortgages versus Treasurys - primarily as they expect swap spreads to tighten - and remained neutral on the mortgage/swap basis. Finally, Credit Suisse had an overweight recommendation on the MBS basis as they believe risk appetite continues to normalize given the initiatives put forth by the Federal Reserve and government. In general, hybrids are favored because of their attractive pickups to fixed rate MBS, along with 15s over 30s.
Application Activity Jumps
With some improvement in mortgage rates, mortgage application activity jumped in the week ending May 2. The Mortgage Bankers Association reported that the 30-year fixed contract rate averaged 5.91%, down 10 basis points from the previous week, while the one-year ARM rate fell to 6.77% from 6.86%.
The Refinance Index increased to 2273.8, up 19.3% from the previous week's year-to-date low of 1905.2. A year ago, the index stood at 2115 with 30-year mortgage rates at 6.16%. For the month of April, the index averaged 2411, down 17% from March's average of 2919. This implies that upcoming prepayment reports could reflect slight to no speed increases, as had been previously projected.
The Purchase Index rose 12.1% to 381.3. A year ago, the index was at 438.
The MBA also reported refinancing share increased to 47.1% from 45.7%. ARM share was also a bit higher to 6.8% from 5.9%.
April Prepay Outlook
Once again, the 2007 and 2006 5% through 6% vintages recorded the largest percentage declines in speeds in April for the conventionals. They dropped 16% for FNMA and 14% for FHLMC Golds. Seasoned vintages on these coupons, as well as, higher coupons were flat to slightly slower, and more in line with forecasts for both. Overall, Fannie and Freddie speeds were 5% slower in the sample versus predictions of "unchanged".
In GNMAs, speeds on 2007 and 2006 5%s prepaid faster than expected, increasing 47% and 22%, respectively, from March. Consensus was anticipating percentage increases of 16% and 18%. Speeds on 6% and 6.5% coupons were substantially slower than projected. For example, speeds were expected to increase less than 5% on average, but slowed 8% for 6s and 3% for 6.5s in the sample. The consensus call was for speeds to increase around 6% in April. However, they were flat on aggregate.
According to eMBS, all FNMA 30-year MBS prepaid at 13.2 CPR in April compared to 14.3 in March, a decline of nearly 8%. FHLMCs prepaid at 13.6 CPR, down 8.1% from the previous month, while GNMAs were nearly 5% slower to 15.4 CPR. MBS issuance for April totaled $106.9 billion, up from $97.3 billion in March. Paydowns were $58.1 billion, down slightly from $60.9 billion previously.
In general, a two-day higher day count was more than offset by higher mortgage rates and lower refinancing activity. For example, in March the 30-year fixed mortgage rate averaged 5.97% compared to 5.92% in February, while the MBA's Refinance Index averaged 13% lower from the previous month at 2919. Lehman and UBS analysts noted weakness in housing was a contributing factor to the slower speeds.
Looking ahead to the May report, speeds on FNMAs are currently expected to slow about 1% with the 2007 and 2006 vintages continuing to experience the largest percentage declines. Contributing factors include one less collection day in May versus April and lower refinancing activity on average. The MBA's Refinance Index averaged 2411 in April compared to 2919 in March.
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