June 19, 2017
Activity was light last week in both the MBS and CMO sectors as bonds rallied on Wednesday after inflation data fell short of estimates for the third consecutive month. The mid-week Fed meeting offered additional details on QE tapering and the unwind of MBS holdings. The MBS market displayed almost no measurable response as MBS yield spreads only widened a few basis points and mortgage rates rose 2bps from the lowest levels this year. The MBA mortgage applications index rose 2.8% last week to the highest level since November 2016. While refi apps increased 9.2% last week, refi activity and MBS prepayments are still relatively low in reference to the last several years.
- Mortgage yield spreads widened last week:
- 15 and 30-year MBS yield spreads ended the week 3 to 4bps wider to Treasuries and swaps
- Investors were active last week in new and seasoned 15yr MBS with coupons ranging from 2’s to 3.5’s and in multi-family FNMA DUS and Freddie K’s.
- The mid-week Fed meeting offered additional details on QE tapering and the unwind of MBS holdings, which are expected to begin later this year subject to monthly caps outlined below.
Trading activity in CMOs was also light last week as the availability of specific structures continues to limit activity with issuance remaining quite weak and finding specific structures to match inquiries remains a challenge. Yield spreads in CMOs widened slightly last week, similar to the MBS sector. Depositories were focused on stable structures with 4- to 6-year average lives.
Rates and Refis
- Mortgage rates increased a couple of basis points from the lowest levels this year:
- 15-year mortgage rates rose 2bps to 3.18%
- 30-year mortgage rates rose 2bps to 3.91%
- 15- and 30-year fixed mortgage rates have now fallen 37 and 41bps respectively year-to-date; however; mortgage rates are 37bps higher than this time last year.
- Mortgage applications for the week ending June 9 rose 2.8% on a 9.2% increase in refi apps, while purchase apps declined 2.8%. Refi apps remain very low.
- The MBA Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year, but especially so for the last two months.
The run of disappointing housing data continued last week with homebuilder confidence unexpectedly dropping 2 points in June. Housing starts and building permits were much weaker than expected in May.
Despite 30-year mortgage rates dropping approximately 40bps year-to-date, the trends remain decidedly negative for new construction. Housing starts dropped 5.5% to their lowest level of the year versus an expected increase of 4.1%. Multi-family starts fell 9.7% and are now at their second lowest level since 2013. Total starts are now down 17.8% since last October. Building permits were expected to rise 1.7% in May but dropped 4.9%. Single family permits fell 1.9% and multi-family permits fell 10.4%. Total building permits are now down 10.0% since the beginning of the year.
Dan Stimpson, CPA
Senior Vice President