FRM Update

July 31, 2017

Mortgage yield spreads tightened last week, but activity improved as the curve steepened and 10-year Treasury yields moved higher after positive news in Germany. Mortgage rates were essentially unchanged last week and mortgage applications for the week ending July 21 rose 0.4% as refi apps rose 3.4%. June’s new and existing home sales data continued to show slowing improvement for the overall housing sector.

MBS

• Mortgage yield spreads tightened last week:
  • 15-year MBS yield spreads ended the week 1bps tighter to Treasuries and swaps
  • 30-year MBS yield spreads ended the week 2bps tighter to Treasuries and swaps
• Curve slope measured by 2- and 10-year Treasuries steepened 5bps last week from 89 to 94bps.
• Investors were active last week in newer production 15yr MBS, primarily in 3.5% coupons.
• Investors were also active in seasoned 20yr MBS, primarily in 3% coupons.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7yr maturities, and in floating rate Freddie K’s, taking advantage of higher yield opportunities in LIBOR rates.

CMOs

Trading activity in CMOs was on the slower side and yield spreads in CMOs widened slightly last week. Depositories continue to be focused on stable structures with 4- to 6-year average lives. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.

Rates and Refis

• Mortgage rates were essentially unchanged last week.
  • 15-year mortgage rates were unchanged at 3.02%
  • 30-year mortgage rates rose 1bps to 3.85%
• 15- and 30-year fixed mortgage rates have now fallen 22 and 21bps respectively year-to-date; however; mortgage rates are 44 and 33bps higher than this time last year.
• Mortgage applications for the week ending July 21 rose 0.4% as purchase apps fell 2.2% and refi apps rose 3.4%. The MBA Refi Index is up 13% and 3.4% the previous two weeks to 1414; however, refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.

Housing

Housing data continue to perplex economists with very choppy data and frequently disappointing reports – despite lowered expectations.  June’s new and existing home sales data continued to show slowing improvement for the overall housing sector.

June’s Existing Home Sales Disappoint: Existing home sales for the month of June disappointed expectations, falling 1.8% MoM (exp. -0.9%).  Single family sales dropped 2.0% while multi-family sales were flat.  The weakest region was the South, dropping 4.7% while sales in the Midwest rose 3.1%.  On a year-over-year basis, existing home sales are now up just 0.7%.  Supply rose from 4.2 to 4.3 months in June; however, inventory has declined 7.1% YOY and the median sales prices of homes is up 6.5% YOY.

New Home Sales Rose in June but Continue Trend of Slowing Improvement: Sales of new homes did improve in June when compared to May 2017 (+0.8% MOM) and June a year ago. However, there was a negative revision of 27k to the three months prior, which left the total trajectory a little weaker than previously estimated. Supporting the story of slowing improvement, total sales were up 6.4% in 2Q 2017 when compared with 2Q 2016, but were down 12.3% on a seasonally adjusted annualized basis when compared to 1Q 2017.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks