August 3, 2020
The Fed’s aggregate mortgage buying was $29.54bn last week. Most of the purchases were in production coupons of UMBS 30-year 2.0s and 2.5s, with volumes of $9.8bn and $8.0bn, respectively. The Fed has purchased approximately $892bn 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 unprecedented level of Fed support has increased pricing and reduced volatility in the sector. Nominal 30-year mortgage spreads to Treasurys touched a stressed level of almost 150 bps. Within a week of announcing the Fed’s intention to purchase up to $50bn per day of agency MBS, spreads came in to 75 bps. In terms of pricing, the UMBS 30-year 2.0%, 2.5%, and 3.0% have risen 5.0, 3.5, and 3.5 points, respectively, since mid-March.
Current Yield Spreads
MBS outperformed Treasurys last week as nominal spreads for production MBS tightened every trading day. 15-year tightened 5 bps to 55 bps while 30-year tightened 10 bps to 81 bps.
Financial institutions continue to be active investors in MBS as exceptional deposit growth and lackluster loan demand has led to high levels of liquidity. While available yields are lower than what they have been in recent years, investors recognize that earning just 5 to 10 bps in Fed Funds is punitive to current earnings as funding costs hover near 60 bps.
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).
Last week activity included the following:
- UMBS 10-year 2.0s & 2.5s
- UMBS 15-year 2.0s to 3.5s (most volume concentrated in 2.0s)
- UMBS 20-year 2.0s and 2.5s
- UMBS 30-year 1.5s to 4.0s
- 15- and 30-Year 2.0’s and 2.5’s LLB Pools ($150k -$200k max loan size)
- Custom CRA Pools
- GNMA Jumbos (MJM 2.5s)
- FNMA Jumbos (FNCK 2.0s to 3.5s)
Mortgage Rates and Refinance Activity
The Treasury rally pushed mortgage rates lower last week. Freddie Mac reported that the 30-year fixed-rate mortgage in its survey ending July 30 decreased 1 bp to a near record low of 2.99% (low was 2.98% on 7/16). The 15-year rate decreased 3 bps to 2.51%.
Mortgage applications for the week ending July 24 inched down 0.8% on a 1.5% decline in purchase applications. Refinancing activity declined 0.4%, which is the first decline in four weeks. Overall, applications continue to point to an improving housing market.
Loan originators appear to be at peak capacity as they have widened the primary/secondary spread for two consecutive weeks. The spread has increased from 1.69% to 1.76% and is 47 bps above the trailing one-year average of 1.29%. If the primary/secondary spread reverts to the 5-year average, we could see 30-year mortgage rates in the 2.50% to 2.75% range.
Some originators are taking advantage of the wide primary/secondary spreads by cutting their interest rates to grow market share. United Wholesale Mortgage (UWM) is offering rates as low as 2.50% for both purchase mortgages and refinances to new customers. UWM is reportedly the one of the largest wholesale mortgage lenders in terms of volumes. Competition like this could eventually tighten the primary/secondary spread and keep prepayment speeds elevated.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP