FRM Update

August 10, 2020

Fed Support   

The Fed’s aggregate mortgage buying was $24.2bn last week. Most of the purchases were in production coupons of UMBS 30-year 2.0’s and GNMA 30-year 2.5’s, with volumes of $7.8bn and $6.2bn, respectively. The Fed has purchased over $900bn of agency MBS since resuming QE in mid-March. Some analysts project the Fed is currently buying 50-60% of new production generic TBA collateral.  The impact to the sector has been significant in terms of reduced volatility and much higher prices.

Current Yield Spreads

MBS outperformed Treasurys for the second consecutive week as nominal spreads for production MBS tightened. 15-and 30-year tightened 10 bps to 45 bps and 71 bps, respectively.  Narrowing spreads and higher prices in the sector continue to present an opportunity for investors that have a need to reposition and/or harvest embedded gains.

Trading Activity

Prepayment concerns and lack of supply are the challenging factors for MBS investors. Buyers have focused on lower coupons and pools with characteristics that make prepayments less likely (low loan balances, 100% NY, low FICOs, investor loans).

The summary below reflects the most active trades from last week.

TBA-Eligible Securities:

Specified Pools:

Non-Deliverable Securities:

Mortgage Rates and Refinance Activity

Mortgage rates drifted lower last week and hit new record lows. Freddie Mac reported that the 30-year fixed-rate mortgage in its survey decreased 11 bps to a record low of 2.88%. The rate was 2.99% one week ago and 3.60% one year ago. The 15-year mortgage rate decreased 7 bps to 2.44%.  These are the lowest rates in Freddie’s survey in nearly 50 years.

Refinance activity fell 7% for the week ended July 31, according to the Mortgage Bankers Association’s seasonally adjusted index. The index has declined 43% from its year-to-date high in mid-March but remains 84% higher than one year ago. The purchase index decreased 2% from the previous week but was 22% higher versus one year ago.

Loan originators are running out of capacity due to refinancing demand as they have widened the primary/secondary spread for three consecutive weeks. The spread has increased 16 bps to 1.85% and is 56 bps above the trailing one-year average of 1.29%. Mortgage rates have plenty of room to decline further if we see a reversion in the primary/secondary spread.

Prepayment speeds were released last week for July activity.  As expected, speeds were mostly higher on conventionals while speeds were mixed on GNMA.  Our complete mortgage prepayment commentary can be found here.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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