FRM Update

June 18, 2018


Mortgages outperformed Treasuries and swaps this past week, as 15-year MBS yield spreads ended the week 3bps tighter to Treasuries, while 30-year MBS yield spreads tightened 1bp. The yield curve continued to flatten last week with the 2/10s spread narrowing from 44bps to just 37bps at the close on Friday. This trend has been a tailwind for the MBS sector as investors have sought defensive structures that provide near-term cash flow.



Activity last week was primarily focused on the following:








Mortgage Rates and Refinance Activity




Mortgage applications pulled back in the week ended June 8 after rising for the first time in seven weeks in the prior release. Total applications pulled back 1.5%, matching the decline in both purchase and refi requests. Interest in fixed-rate products fell 1.1%, while activity in adjustable-rate offerings dropped a larger 6.4%. Conventional mortgage applications slowed 3.4% from a prior-week rebound, while interest in government-backed loans rose 5.7%.



This past week, FHFA announced its proposal for capital requirements for Fannie and Freddie. The plan would replace the current $3bn in capital for each GSE with a more comprehensive risk-based approach, while putting a floor on overall capital. The FHFA presented two options for capital.  The first represented 2.5% of the companies’ total assets and off-balance sheet guarantees, which was ~$140bn based on their 2017 book of business.  The second option was 1.5% of the companies’ trust assets and 4% of their non-trust assets, which would have been ~$104bn.  The FHFA said the options would have protected each company during the financial crisis if they had been subject to the rule in 2007.  More details can be found here.



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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