FRM Update

March 12, 2018

MBS yield spreads versus Treasuries tightened last week, while mortgage rates rose, continuing the trend higher this year.  Mortgage applications rose for the second consecutive week and refi apps rose 1.5% after previously falling for three consecutive weeks.  For the fourth month in a row, MBS prepayment speeds in February declined due to increasing mortgage rates and a decrease in day count.  Prepayments in March are expected to increase, mainly because of a two day increase in day count.  For additional prepayment commentary and charts, please see our February MBS Prepayment Commentary.





CMO yield spreads were mixed, but generally spreads were unchanged last week and have remained stable over the prior month.  Most structures were either unchanged or experienced spread changes of +/- one basis point.  CMO yields of 3% or higher are attainable for typical bank-type structures.  Investor activity is focused on those structures that offer 3% yields or higher base case and up 300bp weighted average lives of four to six years in front sequential and VADM structures with coupons typically ranging from 3.5% to 4.5%, with the majority of the activity last week focused on higher coupon front sequential structures.




Mortgage Rates and Refinance Activity




February MBS Prepayment Speeds

For the fourth month in a row, prepays declined across the board.  FNMA, FHLMC and GNMA I MBS declined between 6% and 7% for both thirty- and fifteen-year collateral.  GNMA II MBS fell 11% for thirty years and 7% for fifteen years.  Increasing mortgage rates continues to hamper refinancing activity.  Another important factor for this month’s prepayments was day count. February contained two less business days than January.  Overall prepayments in March should increase by less than the 10.5% indicated by a two-day increase in day count.  For additional prepayment commentary and charts, please see our February MBS Prepayment Commentary.


Dan Stimpson, CPA

Senior Vice President

Vining Sparks

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