July 9, 2018
MBS yield spreads versus Treasuries were largely stable this week by most measures. Valuations have improved during the first half of 2018, with LIBOR OAS widening by approximately 14bps on current coupon 30-year MBS. The yield curve continued its flattening trend, opening at 33bps and closing 4bps lower at 28bps, which is the lowest level since 2007.
The average rates on 30-year fixed and 15-year fixed-rate mortgages declined for the second consecutive week. Mortgage applications decreased slightly from the previous week and the refinance index fell below 1000, which is a 20-year low.
June prepayment speeds met expectations with a positive impact from increased housing turnover, offset by weakness in refinancings and a decline in the day count. Lower coupon MBS prepayment speeds accelerated slightly, while higher coupons and more seasoned pools slowed slightly. Fannie Mae 30-year prepayments were flat in June, coming in at 10.8CPR. Freddie 30-year prepayments rose 3.0% in June, at a speed of 10.7CPR. 15-year FNMA’s rose 2.0% to 11.1CPR. For more information, please see our Prepayment Commentary here.
Activity last week was dampened because of the holiday and the beginning of the month. The following remains the primary focus for investors:
- 10-Year 2.0s and 2.5s – Investors continue to favor discounted 10-year MBS for the incremental spread and shorter cash flow structure, as rates have increased and the yield curve has flattened.
- 15-year 2.5s – The cheapening trend in this coupon along with the flattening yield curve has resulted in a relatively small pay up over TBA for pools with seasoning between 18 to 36 months. In some cases, investors can potentially receive less price volatility and greater stability of cash flows relative to new pools, for a modest trade-off in projected yield. Please see the latest Strategic Insight discussing the current merits of slightly seasoned, below par 15-year MBS.
- 15-Year 3.0s – Remains a favorite among depositories and trading below par.
- Seasoned Relo 15yr 2.5s and 3.0s – Non-TBA pools having various prepayment exceptions may offer higher turnover.
- FNMA DUS and Freddie K’s – The focus in this sector has been on the 3- to 7-year part of the curve, with investors seeking locked out cash flow and positive convexity.
- Custom MBS Pools – Vining Sparks routinely creates custom MBS pools to assist financial institutions with their Community Reinvestment Act (CRA) requirements. MBS collateralized by residential loans to low-to-moderate borrowers typically qualify for CRA investment if the underlying loans are within a bank’s assessment areas.
Mortgage Rates and Refinance Activity
- Mortgage rates drifted lower for the week ending 7/6.
- 15-year mortgage rates declined 1bp to 3.81%, 41bps above the 12-month average of 3.40%, and 10bps above the YTD average of 3.71%.
- 30-year mortgage decreased 2bps to 4.37%, 30bps above the 12-month average of 4.07%, and 7bps above the YTD average.
- 15-year mortgage rates have increased 61bps in 2018, while 30-year mortgage rates are up 52bps YTD.
Mortgage Applications for the Week Ended 6/29: Total mortgage application volume decreased 0.5% on a seasonally adjusted basis compared with the previous week and is 13.5% lower than the same week one year ago. The composite index has experienced a notable decline through the first half of 2018, climbing only 11 of the 26 weeks, with only four of those gains coming since mid-March.
Applications to refinance a home mortgage declined 2.0% for the week and were 28% lower than the same week one year ago. The refinance share of mortgage activity decreased to 37.2% of total applications from 37.6% the previous week. The weekly decline sent the refinancing index under 1000, which is one of the weakest readings in the last 20 years.
Construction Spending Rose on Stronger Private Residential, Government Outlays: Construction spending rose 0.4% in May, 0.1% less than expected, and there was a mix of revisions to the April (smaller gain) and March (smaller decline) data. On balance, the most recent trend is only slightly softer than expected. Private residential investment, which accounts for just over 40% of total construction spending, rose 0.8% MoM and helped absorb a 0.3% decline in Dollars spent on nonresidential projects. Within the residential activity, all three categories improved over April levels: single family homes +0.6%, multi-family housing +1.6%, and home improvement +0.9%. In the public sector, spending on non-residential structures, which account for essentially all government spending, extended its strong recent run. For the three months ended in May, total government construction spending rose at a greater-than-17% annualized pace, thanks in large part to a skyward trend line at the state and local level.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG