ARM Update

December 4, 2017

Yield spreads for new-issue hybrid ARMs to Treasuries remained stable for the week.  Demand for shorter duration MBS waned during the past couple of months as the yield curve has flattened, which caused 15-year MBS and ARMs to underperform 30-year MBS.  Due to the curve flattening and spread underperformance, the yield differential between ARMs/15-year MBS and longer duration mortgages has tightened considerably.  Investors can now shorten duration without sacrificing a high amount of yield.  This benefit, along with lower dollar prices, has led to favorable demand for new issue ARMs.  Last week, activity was focused on the following:


The FHFA announced the new baseline mortgage conforming loan limits for 2018.  It is a big increase—up 7% to $453,100 from $424,100 (for 1-unit properties).  The 2017 limit was a 1.7% increase from $417,000, which was the limit from 2006–2016.

The baseline limit for Alaska, Hawaii, Guam, and the Virgin Islands remains 50% higher, so jumps to $679,650. The maximum loan limit for high cost areas (the “jumbo conforming” limit) is also 50% higher than the baseline, therefore becomes $679,650. Loans larger than these limits are ineligible for acquisition by the GSEs.



Metrics for some commonly traded structures are below:



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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