FRM Update

January 8, 2018

Mortgage yield spreads versus Treasuries tightened last week and yield spreads remain historically tight. Mortgage rates rose a couple of basis points, and mortgage applications rose 0.7% from a 1.4% increase in refinance activity. The Refi Index has fallen twelve of the last sixteen weeks and refi activity remains at historically low levels. Mortgage prepayment speeds in December slowed for a second consecutive month. December speeds declined slightly less than anticipated, with GNMA speeds slowing the most. January should continue the gradual trend toward slower prepayment speeds. For additional prepayment commentary and charts, please see our December Prepayment Commentary.

MBS

• Mortgage yield spreads tightened last week:
  • 15-year MBS yield spreads ended the week 2 to 4bps tighter to Treasuries and swaps.
  • 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 1bp last week from 52 to 51bps.
• Investor activity last week was slower than normal due to the holiday shortened week and the focus on year-end close.
• Investors were active last week in new and seasoned 10yr MBS, primarily in 2% and 2.5% coupons, which provide strong cash flow.
• Investors were also active in new and seasoned 20yr and seasoned 30yr MBS, primarily in 3% to 4% 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 and new 7yr multi-family FNMA DUS and Freddie K’s, and in uncapped floating rate FNMA ACE bonds, taking advantage of higher yield opportunities in LIBOR rates and attractive floating rate yields.

CMOs

CMO spreads were unchanged to slightly tighter in various types of structures last week, while investor activity was slower than normal due to the holiday shortened week and the focus on year-end close.

Mortgage Rates and Refinance Activity

• Mortgage rates rose last week.
  • 15-year mortgage rates rose 2bps to 3.22%, 12bps above the 12-month average of 3.10%.
  • 30-year mortgage rates rose 2bps to 3.87%, 1bp below the 12-month average of 3.88%.
• Fixed mortgage rates were range bound in 2017 resulting in historically low levels of prepayment activity.
  • 15-year: Low 2.94%;  High 3.30%;  Range 36bps;  Average 3.10%
  • 30-year: Low 3.67%;  High 4.16%;  Range 49bps;  Average 3.88%
• 15-year fixed mortgage rates are 6bps higher than the prior year, while 30-year fixed mortgage rates are 12bps lower than the prior year.
• Mortgage applications for the week ended December 29 rose 0.7%, pushed higher by a 1.4% increase in refinance activity after falling 8.4% the prior week. Purchase apps fell 0.1% after rising 1.2% the prior week.
• The weekly increase in refinance activity is only the fourth weekly increase since the week ended September 15. The small weekly gain in refi apps was driven completely by demand for fixed rate mortgages, which rose 1.4% compared to a 10.1% decline in adjustable rate mortgages; the largest weekly decline for adjustable rate mortgages since early July 2017.
• Looking back at 2017, purchase applications were stronger, but refinancing slowed significantly with the biggest decline occurring alongside the post-election spike in interest rates.

• The MBA Refi Index rose 1.4% to 1152, below its 12-month average of 1338. Refinance activity continues to be historically low and range-bound, holding far below levels of 2016. The Index reached its prior year high the week ending September 8^th at 1637; however, the Refi Index ended 2017 fell twelve of the last sixteen weeks.

December Prepayment Speeds

Mortgage prepayment speeds in December slowed for a second consecutive month. An approximate $6 billion decrease in monthly MBS issuance, according to SIFMA, indicate a continued gradual decline in mortgage activity. December speeds declined slightly less than anticipated, with GNMA speeds slowing the most. A one-day reduction in day count and a small increase in mortgage rates resulted in slower prepayments. January should continue the gradual trend toward slower prepayment speeds due to a combination of seasonal factors, further gradual mortgage rate increases, and a lower day count. For additional prepayment commentary and charts, please see our December Prepayment Commentary.

Housing

Construction spending was higher than expected in November. Total spending on construction projects improved 0.8% in November compared with expectations for a 0.5% gain. Combined, the results show activity for the three months ended in November was 0.8% better than expected and should have positive GDP implications. Residential and non-residential spending at both the public and private levels improved. Spending on private residential projects rose 1.0%, while private non-residential spending rose a similar 0.9%. The public sector spent 5.1% more on residential projects while non-residential activity edged just 0.1% higher.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks