FRM Update

March 19, 2018

MBS yield spreads versus Treasuries were mixed as the curve flattened and mortgage rates fell last week.  Mortgage applications rose for the third consecutive week and refi apps rose 2.2%; however, refinance activity continues to be historically low and range-bound.  The February housing starts and building permits reports were both weaker than expected.






CMO yield spreads were unchanged to slightly wider last week continuing the trend seen over the last month.  Most structures were either unchanged or experienced spread changes of +2bps last week.  CMO yields of 3% or higher are attainable for typical bank-type structures.  Significant 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





Housing Starts and Building Permits Miss Again:  The February housing starts and building permits reports were both weaker than expected as mortgage rates continued to climb.  Housing starts fell 7% MoM (-2.7% exp.) and building permits dropped 5.7% (-4.1% exp.).  The weakness in housing starts was driven entirely by multi-family activity, down 26% MoM after a 26% increase in January.  Single family starts only rose 2.9% during the month.  On a year-over-year basis, housing starts are now down 2.2% as multi-family have dropped 19.7% and single family have increased 6.6%.  The West region has seen the best results with a 27.7% increase in single family starts and a 2.1% increase overall.  The Midwest has fared worst with single family starts falling 38.2% and overall activity down 6.7%.




Home Builders Confidence Drops for Third Month but Remains High:  Rising mortgage rates are creating a headwind for the housing market and it is evident in every report except homebuilder confidence.  The NAHB’s housing market index unexpectedly slipped one point in March from a negatively revised 71 for the month before (February initially estimated at 72).  Despite the three-month downtrend, the absolute level remained near its highest levels in 18 years.  The weakness was centered in the Midwest as surveys covering the Northeast, South, and West all improved.








Dan Stimpson, CPA

Senior Vice President

Vining Sparks

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