FRM Update

April 8, 2019

Yield spreads on current production MBS to Treasuries were mixed last week, with 15-year widening 2 bps to 45 bps, while 30-year tightened 4 bps to 66 bps.  Despite the modest tightening this year, the MBS sector remains appealing as municipals, callable agencies, and corporates have tightened significantly more.

30- and 15-year fixed-rate mortgage rates are down 86 and 80 bps, respectively, from their recent highs.  This has sent the mortgage refinance index higher in recent weeks. For the week ending 3/29, the MBA Refinancing Index surged nearly 40%. This surge has caught the attention of investors, as we’ve seen MBS investors seemingly more focused of late on lower premiums and less prepayment risk.

Mortgage prepayments increased across the board in March. Part of the increase is seasonal as the 2019 “housing season” has kicked off in many markets, but a good portion is refinance activity as evidenced by the MBA Refinancing Index hitting a level not seen since 2016.  A great deal of the refi activity is coming from jumbo collateral (40 CPR in March).  Read more about the March prepayment report here.

The following represents an overview of the activity last week:

15-Year MBS

• Most of the activity has been in lower coupons (2.0’s – 3.0’s). These pools tend to have less negative convexity and exhibit better projected performance in a declining rate environment versus higher coupons.

20-Year MBS

• There’s been healthy demand for seasoned and new production pools. Seasoned 2.5’s and 3.0’s at a discount have attracted investors seeking potential appreciation with declining rates.  The higher coupons (3.5’s and 4.0’s) have greater prepayment risk with pricing ranging from $102-104, but offer more protection from rising rates.

30-Year MBS

• An active trade for investors seeking potentially higher yields and relatively low price volatility has been in current production GN II 5.0’s, trading near $105. Although this is new production 30-year paper, the projected price volatility is relatively low (ranging from -12.0% to -13.0% with rates up 300 bps), primarily because of the higher coupons and prepayment patterns typically associated with FHA/VA borrowers.
• Other trades included several custom GNMA pools designed to help depositories meet their Community Reinvestment Act (CRA) goals for 2019.

CMBS

• Most of the demand has been for floating rate structures (Freddie K’s and FN ACES in which the fixed-rate cash flow has been swapped out for floating-rate cash flow). A prevalent trade has been a newer issue FN ACE 11-year final trading at a discount, offering a yield near 3.00%.

Mortgage Rates and Refinance Activity

Benchmark mortgage rates were mixed last week. 15-year mortgage rates ticked up 7 bps to 3.49%, while 30-year mortgage rates declined 1 bp to 4.07%.

Mortgage Applications Surge As Refinancing Activity Spikes on Lower Rates: Mortgage applications jumped 18.6% last week, the second best week for activity since early January 2016. Purchase applications (+3.4%) were positive for a fourth week in a row but the primary boost came from a surge in refinance applications. Total refinancing activity jumped 38.5% last week, the second strongest week of the cycle. Over that four week period, purchase applications have picked up 15% while refinancing has risen more than 60%. The weekly mortgage applications data continue to reflect the rate sensitivity of the housing sector and provide hopes for home sales heading into the spring selling season.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP