June 4, 2018
Despite a fair amount of volatility in the global bond markets, mortgage yield spreads ended the week close to where they started. 15-year MBS yield spreads ended the week 2bps tighter to Treasuries, while 30-year MBS yield spreads tightened 1bps.
MBS activity was relatively subdued, partially due to the holiday-shortened week and the flight to quality stemming from geopolitical concerns. 15-year MBS with coupons ranging from 2.5% to 3.5% remained popular with financial institutions. More broadly, a significant amount of investor demand this year has been centered on seasoned 15-year 2.5’s and 3.0’s. The flattening yield curve has resulted in a relatively small pay up over TBAs for pools with seasoning and shorter WAMs. In some cases, investors can potentially receive an outsized reduction in price volatility for a modest trade-off in projected yield. For investors that favor deeper discounts, 15-year 2.5s have underperformed over the last month compared to higher coupons.
- Several trades occurred last week in non-TBA pools with loans having various prepayment exceptions versus TBAs, such as seasoned Relo 15yr 2.5’s and 30yr 3’s, which potentially offer higher turnover.
- Ongoing multifamily activity in FNMA DUS and Freddie K’s reflects aversion to negative convexity by many portfolio managers, and also the current advantages of pricing off of the 5- to 7-year part of the curve.
- Ginnie Mae recently announced changes to pooling eligibility requirements for VA insured or guaranteed loans as a measure to protect Veterans from predatory lending practices. Under the new guidelines, all refinance loans insured or guaranteed by the VA must now meet renewed refinance test provisions. Details of the changes can be found on the here.
- Loans with application dates of May 25, 2018 or later must meet the new refinance requirements; therefore, the potential impact to prepayment speeds (presumably slower) could begin in July (August print).
- CMO activity was quite slow for most of the short week. The best activity remained in front sequentials. Modest coupon cuts and also full coupon sequentials off of 30yr 4% and 4.5% FNMA/FHLMC collateral continue to compare well to 15yr and 20yr pools, with similar cash flows and higher yields and spreads.
- Bid wanted activity picked up as prices rallied early in the week, forcing spreads temporarily wider. Most of this was longer bid lists, many of which did not trade. There were, however, many one and two bond lists, mostly smaller blocks, that represented serious inquiries.
- Some portfolio managers purchased short “money market” tranches. A few months ago, most of this paper featured well above market coupons and big premium prices. This is not the case for some recent offerings.
Mortgage Rates and Refinance Activity
- Mortgage rates declined for the second consecutive week, as Treasury yields moved lower.
- 15-year mortgage rates decreased 9bps to 3.79%, 56bps above the 12-month average of 3.32%.
- 30-year mortgage declined 6bps to 4.36%, 35bps above the 12-month average of 4.01%.
- 15-year mortgage rates have increased 57bps in 2018, while 30-year mortgage rates are up 49bps YTD.
- Mortgage applications fell for the sixth consecutive week. Applications fell 2.9% for the week ended May 25 after declining 2.6% in the prior week. Purchase applications were down 1.9%, despite the spring selling season being in full swing.
- The MBA Refi Index has declined eight of the last nine weeks, falling 4.7% to 971 (seasonally adjusted), below its 12-month average of 1290. Refinance activity continues to be historically low and range-bound, averaging a low index level of 1167 since the beginning of the year. Mortgage refinancing in the U.S. has now fallen to the lowest level in 17 years (December 2000).
Mortgage Applications Pull Back: Mortgage applications for the week ending May 25 fell 2.9% on another 4.7% decline in refi apps and a 1.9% drop in purchase apps. Mortgage rates did pull back during the reference week with the 30-year mortgage rate dropping from 4.53% to 4.42%. The 4-week moving average for refi apps has now dropped to its lowest level in over 10 years. Purchase apps continue to trend higher, broadly, but potential homebuyers reference weak inventory and rising prices as a growing challenge – more so than higher mortgage rates at this point.
April’s Disappointment for Housing Continued in the Pending Sales Data: April was unfriendly to the trend lines in the key housing related reports. After data last week showed larger-than-expected declines for both new and existing home sales, the pending sales report did little to brighten the outlook. Pending sales fell 1.3% in April, worse than the modest 0.4% gain economists were expecting. New contract signings in the Northeast were flat after a steep 5.6% decline in March. Activity in the Midwest and South pulled back from improvements the month before and the West saw fewer deals MoM for a seventh consecutive month. A slower pace for pending contracts calls into question hopes for any positive momentum in the existing sales series in the months ahead.
Home Prices Not Slowing Down: The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index reported a 6.5% annual gain in March, the same as the previous month. The 10-City Composite annual increase came in at 6.5%, up from 6.4% in the previous month. The 20-City Composite posted a 6.8% year-over-year gain, no change from the previous month.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG