FRM Update

December 14, 2020

Fed Support   

The Fed’s aggregate mortgage buying last week totaled $32.1bn.  The most heavily purchased was 30-year UMBS 2.0s with a total volume of $13.8bn. The Federal Reserve will target up to $53.1bn MBS from Dec. 14 to Dec. 28, compared to the last cycle of $58.8bn. Gross purchases of MBS have reached nearly $1.4tn during this round of QE.

Current Yield Spreads

Yield spreads on current coupon MBS compared to Treasurys with similar duration were mixed last week. Nominal spreads on 30-year MBS to Treasurys were stable at 71 bps, while 15-year MBS tightened by 4 bps to 34 bps.  Spreads have been driven tighter by the buying from the Fed and depositories.

Trading Activity

The summary below reflects trading activity from last week, which was led by UMBS 15-year 2.0s and non-deliverable pools collateralized by jumbo loans.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Given robust refinance activity,  portfolio managers continue to seek prepay protection to avoid potentially low or negative yields.  Many investors have turned to specified pools (lower loan balances, NY/FL collateral, investor loans) to help partially mitigate faster prepay speeds. The graph below highlights monthly prepayment speeds on different collateral types.

Prepay Friction – 30-Year 3.0s of 2019

Mortgage Rates and Refinance Activity

Mortgage rates were mixed last week according to the survey. The 30-year fixed-rate mortgage remained stable at 2.92% while the 15-year mortgage rate increased 12 bps to 2.50%. In the weekly Freddie Mac survey, the average on the 30-year fixed-rate mortgage held steady at a record low 2.71%.

The new Adverse Market Refinance Fee went into effect this month, but it doesn’t appear to have slowed refinancing activity so far.  Weekly mortgage applications fell 5.0% while refis gained 1.8%.  Refis made up a total of 72% of all mortgage applications.  The refi index remains elevated and is 89% higher than it was one year ago.

The primary/secondary mortgage spread (average 30-year mortgage rate minus 30-year MBS current coupon) decreased 1 bp last week to 1.51%. The spread has narrowed nearly 50 bps since the first week of August but remains 29 bps over the trailing 5-year average of 1.22%. Lenders are likely to tighten spreads further if Treasury rates backup in order to sustain revenue.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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