July 9, 2018
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs:
ARM flows were quiet for most of last week, with originator selling mostly focused in fixed rates. Activity was primarily focused on the following:
- New issue Fannie Mae 7/1s, as spreads have widened since the tights in the first quarter
- Seasoned Fannie Mae 7/1s with 41 months-to reset (MTR) traded just above par
- Seasoned Fannie Mae 10/1s with 54 months-to-reset (MTR) traded just below par
Also, we continue to see interest in short reset pools (20 – 24 months) with par handles and seasoned 7/1s with 60 MTR and 5/2/5 caps.
One notable development over the past two months has been the precipitous decline in G2 supply. Supply in June was down 60% from May, and July is on pace to be even lower. Most of the decrease can be attributed to the newly implemented VA net tangible benefit test as borrowers need 2% rate savings to streamline refinance from a fixed-rate mortgage into an ARM. It has also coincided with a slowdown on discount 3/1s, which given the low caps could be negative for spreads.
According to the latest prepay report, ARM speeds were roughly unchanged overall, with post resets increasing as borrowers continue to react to rate increases over the past year. Fannie Mae ARMs increased 3% overall, slightly faster than the unchanged speeds on FNMA 30-year MBS. The faster speeds can be attributed to higher ARM sensitivity to turnover. This was exhibited across reset buckets as well, with 5/1s increasing the most and 10/1s slowing marginally this month.
Ricky Brillard, CPA
Vining Sparks, IBG