FRM Update

July 27, 2020

Fed Intervention 

The Fed’s aggregate mortgage buying last week was $23.8bn. Most of the purchases were in production coupons of UMBS 30-year 2.0s and 2.5s, with volumes of $8.5bn and $7.9bn, respectively. Some analysts project the Fed is currently buying 50-60% of new-production generic TBA collateral.  Since March 16, 2020 the Fed has purchased nearly $850bn of agency MBS as part of its QE4 program.

The historic level of Fed support has significantly increased pricing and reduced volatility in the sector. Nominal 30-year mortgage spreads to Treasurys touched a stressed level of almost 150 bps. Within a week of announcing the Fed’s intention to purchase up to $50bn per day of agency MBS, spreads came in to 75 bps. In terms of pricing, the UMBS 30-year 2.0%, 2.5%, and 3.0% have risen 5.0, 3.5, and 3.5 points, respectively, since mid-March.

Current Yield Spreads

Nominal spreads for production MBS to Treasurys were relatively stable last week. 15-year remained at 60 bps while 30-year tightened 1 bp to 91 bps. Nominal spreads are wider on a year-over-year basis by 5 to 6 bps.

Trading Activity

Financial institutions continue to be active investors in MBS as exceptional deposit growth and lackluster loan demand has led to high levels of liquidity. While available yields are lower than what they have been in recent years, investors recognize that earning just 5 to 10 bps in Fed Funds is punitive to current earnings as funding costs hover near 60 bps.

Prepayment concerns and lack of supply are the challenging factors for MBS investors. Buyers have focused on lower coupons and pools with characteristics that make prepayments less likely (low loan balances, 100% NY, low FICOs).

Last week activity included the following:

TBA-Eligible Securities:

Specified Pools:

Non-Deliverable Securities:

Mortgage Rates and Refinance Activity

Mortgage rates inched up modestly last week but remain at historical lows. Freddie Mac reported that the 30-year fixed-rate mortgage in its survey ending July 23 increased from a record low of 2.98% to 3.01%. The 15-year rate increased 6 bps to 2.54%.  In another survey from that doesn’t include origination fees, 30-year rates declined 1 bp to 3.14%, while 15-year increased 2 bps to 2.75%.

Mortgage applications for the week ending July 17 rose 4.1% on a 1.8% increase in purchase apps and a 5.3% increase in refi apps.  The 78% increase in purchase apps since their April low points to existing home sales rebounding sharply.  Existing home sales fell 32% from February through May. Mortgage applications point to sales recovering all the lost activity over coming months.

Loan originators appear to be operating near capacity as they widened the primary/secondary spread from 1.69% to 1.72% last week, which is 43 bps above the trailing one-year average of 1.29%. If the primary/secondary spread reverts to the 5-year average, we could see 30-year mortgage rates in the 2.50% to 2.75% range, which would obviously impact the current refi wave.

Some originators are taking advantage of the wide primary/secondary spreads by cutting their interest rates to grow market share. United Wholesale Mortgage (UWM) is offering rates as low as 2.50% for both purchase mortgages and refinances to new customers.  UWM is reportedly the largest wholesale mortgage lender in terms of volumes. Competition like this could eventually tighten the primary/secondary spread and keep prepayment speeds elevated.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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