Mortgage volume showed a bit more life this week versus the previous week, averaging modestly above normal versus the average in the previous week.

The week saw  a continued grind higher in price and tighter in spread as supply was very light —averaging less than $3.0 billion per day.

Based on the latest data on Treasury and Federal Reserve MBS purchases, these agencies are buying twice as much as that daily average. In addition, there was servicer buying as yields fell with the 10-year declining 19 basis points through Thursday from last Friday's close as a bit of flight to quality returned to the markets.

Outside of the Fed, money managers, hedge funds, and banks were generally two-way with up in coupon trades seeing particular support. Asian investors were  on the quieter side, though small buying in Ginnies was noted. In other mortgage related activity, up in coupon outperformed; 15s were mixed versus 30s, as were GNMA/FNMAs; specifieds were quiet; and conventional dollar rolls were little changed.

Fed and Treasury MBS Purchases

In April, the Treasury bought just $11.5 billion, which is the lowest amount since September when the government agency initiated the program. This is equal to $548 million per day. To date, the Treasury has bought $135.8 billion.

Fed gross purchases of MBS for the period May 7 through 13 totaled $35.58 billion; net purchases were $27.2 billion, resulting in an average daily net purchase of $5.4 billion, up from $5.1 billion in the previous report. Total purchases by the Fed to date total nearly $457 billion, or over one-third of the way into their plan to purchase $1.25 trillion in 2009.

Housing News Highlights

RealtyTrac reported foreclosure filings in April increased just a quarter of 1%. However, filings are up 32% from a year ago. Over 342,000 properties received a filing, or one in every 374 households, which is "the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005," said the firm's press release. Nevada, Florida, California and Arizona continue to hold the distinction of being the top states in terms of foreclosure rates.

Refi Activity Declines as Fixed Mortgage Rates Increase Slightly

According to the Mortgage Bankers Association, the Refinance Index declined 11.2% to 4588.6, with refinancing share as a percent of total applications falling to 71.9% from 74.4%.

As has been highlighted, refinancing activity has been limited by a number of factors including: capacity constraints at mortgage lenders ranging from employment to need to gear up systems to handle the new programs, ongoing declines in home prices, employment issues, and second liens.

The MBA also reported the Purchase Index rose 0.5% to 265.7 from 264.3 as first time homebuyers take advantage of the affordability in home prices and the $8,000 tax credit this year.

Purchase activity could see better strength going forward due to the Department of Housing and Urban Development 's allowing approved lenders, nonprofits and state and local governments to essentially advance the $8,000 income tax credit for first time home buyers to be used to help with the down payment. Federal Housing Administration loans require a minimum 3.5% down payment. For a minimum $8,000 investment, a buyer can purchase a home worth $228,571.

Fixed mortgage rates were little changed last week with 30-years higher by two basis points to 4.86% and 15-years up one basis point to 4.52%, according to Freddie Mac's weekly survey. On the adjustable side, rates were lower by seven and eight basis points respectively on one-year ARM and five-year hybrid ARMs to 5.18% and 5.57%.

Meanwhile, total agency MBS monthly issuance halfway through May is bumping up against last month's total issuance at $132.8 billion compared to $135.5 billion in April.

Prepayment Outlook

At this time, May prepayment speeds on FNMA MBS are expected to increase over 30% from April's levels. This is down slightly from previous estimates of 40% made before the release of the April report.

The largest percentage increases are projected to be in the 2007 and 2006 vintages at over 40%, and in 6.5% and 7% coupons at close to 50%. GNMA speed increases are more moderate at over 10% higher from April.

By vintage and coupon, the largest percentage increases are expected in 2008 vintages and in 5% coupons. Paydowns are estimated at over $130 billion compared to $107 billion in April.

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