September 10, 2018
Adjustable-rate mortgage flows have been flat to start the month as the focus remains on the fixed-rate origination cycle despite yields moving higher. Dollar prices on newer issue ARMs remain attractive, with most new issue 10/1s trading between 100 and 101 (compared to 103 and 104 in 2016 and 2017). With mortgage rates being stable for months now, the low dollar price on new production indicates that primary/secondary spreads have moved tighter in the agency ARMs market this year.
Last week, ARM activity was primarily focused on the following:
- Fannie Mega 7/1s with a short reset date and WACs near 4% traded at a moderate premium
- In seasoned space, Fannie 7/1s maturing in 25-years with coupons greater than 2% traded above par
- 2/2/6 cap structure seasoned 5/1 hybrid ARMs with approximately 25 months-to-reset (MTR) traded around par
- Swaps and portfolio cleanups for underperforming bonds sold in 2012 and 2013 and reinvested at higher rates
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s tightened, while FNMA and FHLMC OAS’s widened.
ARM prepayments increased for all Fannie Mae, Freddie Mac, and Ginnie Mae products except LIBOR-indexed 3/1s, which were off slightly. Issuance decreased very slightly for Freddie Mac and increased for Fannie Mae and Ginnie Mae. Issuance activity was primarily focused on 5/1s and 7/1s.
Ricky Brillard, CPA
Vining Sparks, IBG