April 20, 2020
Since mid-March the Fed has purchased $500bn of agency mortgage-backed securities as part of its effort to stabilize the sector. The buying has focused on the UMBS 30-year 2.5% and 3.0% coupons. To put the scale of buying into context, during the sums of QE1 in 2008/2009 and QE3 in 2012/2013, the Fed bought about $1.4tn of mortgages; each of these episodes took over a year to complete. The New York Fed has been ratcheting down its announced purchases over the past two weeks; the announced daily total of mortgage purchases has been reduced from $50bn/day to $15bn/day this past week.
The unprecedented scale of Fed purchases has significantly reduced price and spread volatility in the sector. Prices have been pushed far higher and spreads have narrowed from distressed levels. For example, the price of FNMA 30-year 3.00s was approximately $100-20 on March 20, and today these securities are bid near $105-12. Daily price changes of mortgages are down to single digit ticks instead of points a few weeks ago. Over the past month, nominal spreads on 15- and 30-year MBS to Treasurys have declined 52 bps and 54 bps, respectively.
Although nominal spreads moved wider last week, we continued to see financial institutions selling TBA-deliverable securities, due to the improvement in pricing over the past month. Proceeds and new investments have been focused on non-deliverable MBS and sectors with wider spreads (CMOs, CMBS, Municipals, Corporates). Spreads remain wider for non-deliverable MBS securities that the Fed is not buying, such as GNMA 15-year pools, and both GNMA and conventional pools collateralized by jumbo loans.
Mortgage Rates and Refinance Activity
Mortgage rates continued to decline last week, with 15-year declining 9 bps to 3.08% and 30-year decreasing 16 bps to 3.53%. These are the lowest mortgage rates observed since 2012. Mortgage applications for the week ending April 10 rose 7.3% as refi apps rebounded 10.1% but purchase apps continued 1.8% lower. Purchase applications have now fallen for five consecutive weeks, down 35%, portending a sizeable drop in housing transactions.
The Refi Index printed 4,242 for the week ending April 10, and the most recent level now resides close to the rolling monthly average. The print is still well below the surge past 6,000 that we saw in early March. Looking forward to May and June prints, refi application demand is strong and the question remains how much COVID-19 disruption there will actually be.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP