March 27, 2017
Fixed Rate Mortgage Market Update
Trading activity across the MBS and CMO sectors improved last week, but remains light compared to activity over the last month. The mortgage market continues to trade in a tight range with minimal changes in yield spreads. Yield spreads in 15yr and 30yr fixed MBS were unchanged to slightly wider to Treasuries and swaps last week. 30yr mortgage rates fell 7bps last week, but have increased 66bps post-election. Mortgage applications declined for the first time in a month, falling 2.7%. Purchase apps remain positive relative to mid-2016 levels, while refi apps remain very low. While the trend toward slower prepayment speeds is likely to continue, day count and seasonality will likely cause a bounce in March prepayment speeds.
- Mortgage yield spreads were unchanged to slightly wider last week:
- 15yr and 30yr MBS spreads ended the week unchanged to 2bps wider to Treasuries and were unchanged to 1bps wider to swaps
- The degree of duration extension due to slower prepayments pushed some portfolio managers to focus more on shorter assets as they redeployed this month’s paydowns
- A combination of higher yield and deference to convexity inspired activity in new and seasoned multi-family FNMA DUS and Freddie K’s
Trading activity in CMOs was also light last week relative to most of the balance of 2017 thus far, though availability of specific structures continues to limit activity as issuance remains quite weak. Notable secondary market activity included depositories buying front sequential structures and also buying VADMs with 3.5% and 4.0% coupons.
Rates and Refis
- Mortgage rates declined last week
- 15yr mortgage rates fell 6bps to 3.44%
- 30yr mortgage rates fell 7bps to 4.23%
- 15-year and 30-year fixed mortgage rates have now fallen 11bps and 9bps year-to-date; however, mortgage rates are up 56bps and 66bps post-election, respectively.
- The MBA mortgage application report for the week ending March 17 fell 2.7% on a 2.1% decline in purchase apps and a 3.3% decline in refi apps. Looking at the 4-week moving averages, purchase apps remain positive relative to mid-2016 levels while refi apps remain very low.
- The escalation in mortgage rates last November and December continues to limit mortgage refinance applications. While the trend toward slower prepayment speeds is likely to continue, day count and seasonality will likely cause a bounce in March prepayment speeds.
Existing Home Sales Decline: Existing home sales fell more than expected in February, falling 3.7% to an annualized 5.48MM unit pace on weaker sales of both single family homes and condos. February’s pullback followed a new cycle-high pace in January. Sales declined in three of the four regions and gains in the South moderated. Sales were 5.4% higher YoY and are equal to the prior two-years’ average. Inventory was up MoM but has fallen on a YoY basis for 21 consecutive months, and supply rose from 3.5 to 3.8 months but remains tight.
New Home Sales Set Seven Month High: February’s new home sales were much stronger than expected. February’s 592k annualized pace (+6.1%) is second only to last July’s 622k pace. While February’s report was positive, the general trend remains choppy and sideways since last summer’s peak. Despite a slight uptick in the number of new homes listed for sale, the faster sales pace dropped supply on hand from 5.6 to 5.4 months.
Dan Stimpson, CPA
Senior Vice President