FRM Update

July 26, 2021

Current Yield Spreads

Concern over the spread of the Delta variant sent the 10-year Treasury down to 1.13% early last week before it recovered to finish the week at 1.28%. MBS yield spreads were mixed on the week.  Spreads on 15-year MBS (1.5s) tightened by 2 bps to 38 bps, while yield spreads on 30-year MBS (2.0s) widened 1 bp to 64 bps.  Higher coupons performed better in the 30-year sector as 30-year 3.0s and 3.5s tightened 7 bps and closed at their highest prices since May 25 and May 7, respectively. The move higher was reportedly driven by CMO traders seeking collateral for new issuance.

Trading Activity

The summary below reflects purchase activity from the previous week.  The most actively traded sector was UMBS 20-year 1.5s & 2.0s, followed by UMBS 15-year 1.5s.  The rate rally has led to an increase in two-way flow in recent weeks as bid-wanted lists are circulating with greater frequency.

TBA-Eligible Securities:

Non-Deliverable Securities:

Specified Pools:

Mortgage Rates and Applications

U.S. mortgage rates fell again last week according to  The 15-year mortgage rate declined 7 bps to 2.31% and the 30-year mortgage rate declined 2 bps to 3.01%.  The 30-year mortgage rate has now declined for five consecutive weeks. This has renewed prepayment concern among investors, as most of the MBS space is trading at a premium.

The Biden administration announced Friday plans to expand pre-existing relief programs to prevent foreclosures on homeowners who have fallen behind on their mortgages during the COVID-19 pandemic. The new modification options will be offered to borrowers with Federal Housing Administration loans and other federally guaranteed mortgages (Ginnie Mae). The change is intended to extend the length of their mortgages and lower monthly principal and interest payments by up to 25%.  According to the Mortgage Bankers Association, approximately 2 million homeowners are in forbearance plans.  The highest concentration can be found in the Ginnie Mae sector, where 6.2% of all FHA and VA loans are in forbearance. Modifications made to these loans could lead to buyouts from the mortgages they are pooled within. The potential impact will likely be greatest on older, higher coupon mortgages.

Mortgage applications for the week ending July 16 continued to show evidence of weakness in housing relative to the second half of 2020.  New applications fell 4.0% compared to the previous week.  Purchase applications fell 6.4% and are now down 25% from their level at the beginning of the year.  Applications for refinance fell 2.8% and are now down 28%.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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