ARM Update

October 29, 2018

Last week, we saw activity focused in pre-reset 7/1 hybrid ARMs.  This sector has been hampered by an increase in at-reset speeds, which has caused valuations on pre-reset 7/1s to cheapen by approximately 1.5 points this year.  These speeds will likely continue because the 2012-2013 vintages that will be resetting in the next few years are facing an even higher rate shock compared to the 2011 borrowers.  Hybrid ARM 7/1s are 15 bps wider versus the start of the year and 3-4 bps wider over the past couple of weeks.  This widening has occurred despite supply continuing to trend lower, at below 1 billion per month.  Hybrid ARM 7/1s offer compelling value versus 5/1s, as they trade at those wider spreads (see below).

In addition to seasoned 7/1s, ARM activity was spread across a variety of lists and primarily focused on the following:

The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA widened reflecting lower prices and underperformance.  FNMA and FHLMC tightened reflecting higher prices and outperformance.  Any recovery in risk assets should benefit ARM spreads, which have reached their widest spread levels of the year.

Ricky Brillard, CPA


Vining Sparks, IBG

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