December 11, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries remained stable for the week. In fact, spreads have traded sideways for the past month, despite the 10-15 bps selloff in short-term Treasuries. This has left ARMs less expensive on a relative basis, especially compared to longer duration MBS. The benefit is that investors can likely achieve yield targets with less duration.
Last week, activity was focused on the following:
- New issue FN/FH 7/1s (offer similar yields to 15-year MBS with less price volatility and a pick-up of OAS)
- GN 3/1 2.00s
- GN 5/1 2.50s
Hybrid ARM issuance for November totaled $1.8bn, a decline of 14.2%, or $299.4mm from October. The recent decline can be largely attributed to the convergence of variable- and fixed-rate mortgage rates. According to Bankrate.com, there was only a 17 bps difference between the rate for a 7/1 ARM and 30-year mortgage last week.
Prepayment speeds for conventional hybrid ARMs dropped by approximately 10% in November. In aggregate, Fannie ARM speeds went down 2.1CPR to 20.2CPR. Libor-based Fannie 5/1s slowed 2.6CPR to 24.0CPR, 7/1s decreased 0.9CPR to 17.9CPR, and 10/1s declined 3.2CPR to 13CPR. In the Freddie sector, 5/1s, 7/1s, and 10/1s paid 25.7CPR (-1.7CPR), 17.3CPR (-1.4CPR), and 11.7CPR (-2.3CPR), respectively.
Prepayment speeds for Ginnie Mae securities did not decline at the same rate as their conventional counterparts. In aggregate, Ginnie ARM speeds declined 3.6% or 0.8CPR, to 21.5CPR. The churning around six months of seasoning for VA loans continues to impact prepayments. The capacity to streamline refi is the primary cause, as the more aggressive TPO/servicers take advantage of this allowance for income opportunities. Ginnie has created a task force to work on the problem, which may result in revocation of some Ginnie issuers.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG