February 20, 2018
Mortgage related security yield spreads to Treasuries tightened and the curve flattened last week, as volatility remains elevated in the financial markets. Mortgage rates were mixed last week but have increased almost 50bps this year. Mortgage applications for the week ending February 9th fell 4.1%. Purchase apps were down 5.9% and the MBA Refi Index fell 1.9% to 1274. Refinance activity continues to be historically low and range-bound averaging a low index level of 1270 in 2018. Housing starts and building permits boomed in January with starts up 9.7% and permits up 7.4%.
- Mortgage yield spreads tightened last week, reversing the widening trend experienced over the last month:
- 15-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 2 to 4bps tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 9bps last week from 77 to 68bps but remains above the low point of 49bps in early January.
- Investors were active in seasoned 30yr MBS, primarily in 3.5% coupons in HLTV collateral, which offer attractive yields and spreads in the sector.
- Investors were also active in seasoned 20yr MBS, primarily in 3% and 3.5% coupons and in newer 4% coupons. 15yr MBS, generally in lower coupons at discount prices, were also attractive to investors last week.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS offered at below par prices.
CMO yield spreads were unchanged last week, while CMO yields of 3% or higher are attainable for typical bank-type structures. Investor activity is focused on those structures that offer 3% yields or higher and weighted average lives around five to six years in sequential and VADM structures with coupons typically ranging from 3.5% to 4%.
Mortgage Rates and Refinance Activity
- Mortgage rates were mixed last week:
- 15-year mortgage rates rose 5bps to 3.69%, 55bps above the 12-month average of 3.14%.
- 30-year mortgage rates fell 1bp to 4.30%, 40bp above the 12-month average of 3.90%.
- 15-year mortgage rates have risen 49bps in 2018, while 30-year mortgage rates are up 45bps YTD.
- Mortgage applications for the week ending February 9th fell 4.1% after rising 0.7% the prior week. Purchase apps were down 5.9% after being unchanged the prior week. Refi apps fell 1.9% after rising 0.9% the prior week.
- The MBA Refi Index fell 1.9% to 1274, slightly below its 12-month average of 1345. Refinance activity continues to be historically low and range-bound averaging a low index level of 1270 in 2018.
Strong Start to 2018 for New Housing Activity: Housing starts and building permits boomed in January with starts up 9.7% and permits up 7.4%. These data have big month-over-month swings when weather in one region is worse-than- or milder-than-normal, as is the case with the January data. However, the YoY data provide a little more clarity on the overall strength by region. Housing starts are now up over 70% YoY in the West, but are down almost 30% in the Midwest. While the pace of gains in housing activity has slowed, it continues to be positive and the sector is expected to be accretive to economic growth this year.
Dan Stimpson, CPA
Senior Vice President