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.
- Mortgage yield spreads were mixed last week.
- 15-year MBS yield spreads ended the week unchanged to 1bp tighter to Treasuries and swaps.
- 30-year MBS yield spreads ended the week 1 to 2bps wider to Treasuries and 1 to 2bps tighter to swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened from 63 to 55bps.
- Investors were active in seasoned 15yr MBS in coupons ranging from 2% to 3% and in newer production 3.5% coupons.
- Investors were also active in seasoned 20yr MBS, primarily in 3.5% coupons and newer 4%’s, which offer attractive yields and spreads in the sector.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7 years to maturity.
- Investors also remain active in uncapped floating rate multi-family bonds, taking advantage of higher yield opportunities in LIBOR rates and attractive floating rate yields.
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
- Mortgage rates fell last week.
- 15-year mortgage rates fell 4bps to 3.72%, 54bps above the 12-month average of 3.18%.
- 30-year mortgage rates fell 4bps to 4.30%, 38bps above the 12-month average of 3.92%.
- 15-year mortgage rates have risen 52bps in 2018, while 30-year mortgage rates are up 45bps YTD.
- Mortgage applications rose for the third consecutive week, rising 0.9% for the week ending March 9th and 0.3% the prior week. Purchase apps rose 3.4% after falling 0.5% the prior week. Refi apps fell 2.2% after rising 1.5% the prior week.
- The MBA Refi Index fell 2.2% to 1159, below its 12-month average of 1338. Refinance activity continues to be historically low and range-bound averaging a low index level of 1235 since the beginning of the year.
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