FRM Update

February 26, 2018

Mortgage related security yield spreads to Treasuries widened and the curve flattened last week.  Mortgage rates moved higher again last week, continuing the trend higher over the last six months.  Mortgage applications fell for the second consecutive week.  Refinance activity fell 7.1% to 1183 and continues to be historically low and range-bound.  Existing home sales surprisingly fell for the second consecutive month in January to the slowest pace in four months.

MBS

• Mortgage yield spreads widened last week.
  • 15-year MBS yield spreads ended the week 1 to 4bps wider to Treasuries and swaps.
  • 30-year MBS yield spreads ended the week unchanged to 1bp wider to Treasuries and swaps.

• Curve slope measured by 2- and 10-year Treasuries flattened another 6bps last week from 68 to 62bps but remains above the low point of 49bps in early January. The curve has flattened 15bps over the last two weeks.
• Investors were active in 15yr MBS in 2.5% and 3.0% coupons offered at below par prices in conventional and relo collateral.
• Investors were also active in seasoned 30yr MBS, primarily in 3.5% coupons in HLTV collateral, which offer attractive yields and spreads in the sector.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS offered at below par prices.

CMOs

CMO yield spreads were unchanged last week and have remained stable over the last month. 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 2.5% to 4%.

Mortgage Rates

• Mortgage rates rose last week continuing the trend higher over the last 6 months.
  • 15-year mortgage rates rose 5bps to 3.74%, 58bps above the 12-month average of 3.16%.
  • 30-year mortgage rates rose 1bp to 4.31%, 41bp above the 12-month average of 3.90%.
  • 15-year mortgage rates have risen 54bps in 2018, while 30-year mortgage rates are up 46bps YTD.

Refinance Activity

• Mortgage applications for the week ending February 16th fell 6.6% after falling 4.1% the prior week. Purchase apps were down 6.2% after falling 5.9% the prior week. Refi apps declined 7.1% after falling 1.9% the prior week.
• The MBA Refi Index fell 7.1% to 1183, below its 12-month average of 1344. Refinance activity continues to be historically low and range-bound averaging a low index level of 1259 in 2018.

Housing

Existing home sales surprisingly fell for the second consecutive month in January, down 3.2% MoM to the slowest pace in four months as activity slowed in each of the four geographic regions (also for a second month).  Other metrics showed a tick up in months’ supply and number of days on the market.  Prices of existing homes sold in January fell to the lowest median price since March 2017.

With declines in both activity and prices of existing home sales in January, it will be interesting to see if higher mortgage rates pressure the housing market over the next several months.  Home sales have proven to be rate sensitive when mortgage rates push above 4.00%.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks