April 27, 2020
Since mid-March the Fed has purchased $561bn of agency mortgage-backed securities as part of its effort to stabilize the sector. The buying has been 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 Fed has been ratcheting down its announced purchases over the past several weeks. The announced daily total of mortgage purchases has been reduced from a peak of ~$50bn/day to a planned $8bn/day this week. The lower daily purchases still offer strong support and at a level that is similar or better than what the Fed did during QE3.
The Fed also announced they will no longer be buying UMBS 30-year 4.0s or 15-year 3.0s. There was some modest widening in these coupons after the announcement.
The 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 $105-13. Daily price changes of mortgages are down to single digit ticks instead of points a few weeks ago. Over the past week, nominal spreads on 15- and 30-year MBS to Treasurys have tightened 16 bps and 6 bps, respectively.
Financial institutions continue to sell 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). The Fed’s buying program does not provide price assistance to non-deliverable MBS securities. Therefore, spreads are wider for GNMA 15-year pools, and both GNMA (MJM 3.5s) and conventional pools (CK 3.5s) collateralized by jumbo loans. Last week we also saw customers buying 20-year 2.5s and 15-year 2.0s.
Mortgage Rates and Refinance Activity
Mortgage rates were relatively stable last week, with 15-year increasing 5 bps to 3.13% and 30-year increased 3 bps to 3.56%. These rates are near the lowest mortgage rates observed since 2012. Mortgage volume appears to be settling into a new normal, as refinance demand stays high and purchase demand sits at a five-year low. For the week ended April 17, new applications for home purchases rose 2.1% during the week after falling 33% over five consecutive weekly declines. Applications for refinance pulled back 0.8% during the week but were a sharp 225% higher than one year ago.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP