December 18, 2017
Mortgage yield spreads versus Treasuries were mixed last week as curve flattening continues and yield spreads remain historically tight. Mortgage rates rose a couple of basis points, while mortgage applications fell 2.3% on lower purchase and refinance activity. The Refi Index has fallen eleven of the last fourteen weeks and refi activity remains at historically low levels. The proposed tax reform bill lowers the cap on the mortgage interest deduction for new home purchases from $1,000,000 to $750,000, and includes both primary residences and second homes.
- Mortgage yield spreads were mixed last week:
- 15-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and swaps, lagging 30-year MBS due to curve flattening.
- 30-year MBS yield spreads ended the week 2 to 3bps tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 7bps last week from 58 to 51bps.
- Investors were active last week in new and seasoned 15yr MBS, primarily in coupons at a discount (2%), at par (2.5%), and at premium (3%) prices with limited extension in the lower coupons, in both TBA-eligible and relo collateral.
- Investors were also active in seasoned 30yr MBS with 3% to 4% coupons, which offer attractive yields and spreads in the sector and perform well in a flattening curve environment.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned 5yr and new 7yr multi-family FNMA DUS and Freddie K’s.
- Multi-family investors were also active in 10yr fixed swapped to uncapped Libor floaters.
CMO spreads tightened in various types of structures last week, while activity remained steady in the sector with good two ways flows. Investor focus continues in shorter PAC structures offering extension protection. Odd lot cleanup activity also remains elevated as investors approach year-end.
Mortgage Rates and Refinance Activity
- Mortgage rates rose last week to levels close to their respective YTD averages.
- 15-year mortgage rates rose 2bps to 3.16%, 6bps above the YTD average of 3.10%.
- 30-year mortgage rates rose 3bps to 3.83%, 5bps below the YTD average of 3.88%.
- 15- and 30-year fixed mortgage rates have fallen 8 and 23bps year-to-date, respectively.
- Mortgage applications for the week ended December 8 fell 2.3%, as both purchase and refinance applications declined. Purchase apps fell 1.1% after rising 2.4% the prior week.
- The MBA Refi Index fell 2.5% to 1281, slightly below its YTD average of 1348; however, refinance activity continues to be historically low and range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, the Refi Index has fallen eleven of the last fourteen weeks.
Tax Reform – Mortgage Interest Deduction
The tax reform bill is expected to be voted on this week by Congress. The tax legislation lowers the cap on the deduction for new home purchases from $1,000,000 to $750,000 and includes both primary residences and second homes.
- Homeowners with existing mortgages that were taken out to buy a home, there will be no change to the current mortgage interest deduction.
- Homeowners with new mortgages on a first or second home, the home mortgage interest deduction will be available up to $750,000.
Dan Stimpson, CPA
Senior Vice President