ARM Update

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:

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

Investment Strategist

Vining Sparks, IBG

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