FRM Update

January 22, 2018

Mortgage security yields increased last week and have moved higher this year, as treasury yields and mortgage rates have pushed higher. Mortgage yield spreads versus Treasuries were mixed last week as Treasury yields moved higher across the curve and are currently in the upper end of the trading range. This increase in MBS yields drove mortgage rates 10 to 12bps higher last week and 21 to 23bps higher this year. The MBA Refi Index increased for a second consecutive week, rising 4.4% to 1314, but remains slightly below its 12-month average of 1343. Refinance activity continues to be historically low and range-bound. Housing starts and building permits slowed in December, and homebuilder confidence also slipped, but remains high.

MBS

• Mortgage yield spreads were mixed last week:
  • 15-year MBS yield spreads ended the week 1 to 2 bps wider to Treasuries, but tightened 1 to 2bps to swaps.
  • 30-year MBS yield spreads ended the week 1 to 3bps wider to Treasuries, but tightened 2 to 4bps to swaps.

• Curve slope measured by 2- and 10-year Treasuries steepened 5bps last week from 54 to 59bps
• Investors were active last week in higher coupon 15yr MBS, primarily in 3.5% coupons.
• Investors were also active in seasoned 20yr MBS, primarily in 3.0% and 3.5% coupons, which offer attractive yields and spreads in the sector and perform well in a flattening yield curve environment.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned 5yr multi-family FNMA DUS and Freddie K’s.

CMOs

• CMO spreads were unchanged in various types of structures last week, while investor activity picked up compared to the last several weeks.

• CMO yields have increased recently and yields ranging from 2.75% to 3.00% are available in various structures.

Mortgage Rates and Refinance Activity

• Mortgage rates rose again last week, continuing a trend higher in 2018.
  • 15-year mortgage rates rose 12bps to 3.43% (exceeding prior 12-month peak of 3.31%), 32bps above the 12-month average of 3.11%.
  • 30-year mortgage rates rose 10bps to 4.06%, 18bp above the 12-month average of 3.88%.
  • 15-year mortgage rates have risen 23bps in 2018, while 30-year mortgage rates are up 21bps YTD.
• Mortgage applications for the week ending January 12 rose 4.1% on a 2.7% increase in purchase apps and a 4.4% increase in refi apps. Looking at the 4w/4w moving averages, purchase apps continue to look positive for future home sales, while refi apps remain very low.

• The MBA Refi Index increased for the second consecutive week, rising 4.4% to 1314, but remains slightly below its 12-month average of 1343. Refinance activity continues to be historically low and range-bound. The Index reached its prior year high the week ending September 8^th at 1637; however, the Refi Index ended 2017 falling twelve of the last sixteen weeks.

Housing

• Housing Starts and Building Permits Activity Slows: The December Housing Starts report showed a surprising 8.2% drop in new starts, another volatile report on housing that puts the rate back closer to the low end of the recent trend. Moreover, in just one report, housing starts for the year went from positive to down 6%. As for December, a drop in single family activity (down in all regions, but largest drop in the South) was the driver with starts down almost 12% versus a 1.4% increase for multi-family units. However, for the year, single family starts remain up 3.5%, while multi-family dropped 22.6%. As for new building permits, they fell, but only 0.1% MoM. Single family permits rose 1.8%, while multi-family dropped 4%.

• Home Builder’s Remain Confident: The NAHB’s Housing Market Index slipped as expected to a still-high 72 to start 2018. The index had risen unexpectedly to 74 in December, marking its strongest level since July 1999. At 72, the index matched its second-best reading over the same span. Overall, the outlook from home builders was a little softer than in December but held at a level consistent with a continuation of the housing sector’s recent strength.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks