March 9, 2020
Nominal spreads on current-coupon MBS compared to Treasurys widened last week, with 15-year increasing 2 bps to 68 bps, and 30-year increasing 3 bps to 110 bps. We are seeing a continued widening trend today with production coupons because of an increase in prepayment expectations. The refi index bounced 26% higher to 3,594 for the week ended February 28. The expectation for higher levels of refinance activity is reasonable based on the precipitous drop in Treasury yields during the past week.
Prepayment speeds for February were released last week, and speeds ticked up from January because of lower interest rates and seasonal factors. Please see here for a complete commentary on prepayment speeds.
The improvement in pricing has caught the attention of investors as we’ve seen a pick-up in bid lists and selling. Investors are generally trying to reduce odd-lot positions and other pools that exhibit some type of weakness (low loan count, aggressive servicers, etc.).
In terms of investing activity, most investors have steered towards 15-year 2.0s and 2.5s and 20-year 2.5s and 3.0s. There’s also been demand for non-deliverable pools collateralized by jumbo loans (GNMA & FNMA 30-year 3.0s and 3.5s.)
Mortgage Rates and Refinance Activity
Mortgage rates were mixed last week, with 15-year falling 9 bps to 2.98% and 30-year increasing 4 bps to 3.66%. Mortgage applications rose 15.1% for the week ending February 28 on a 26.0% increase in refi apps and a 2.7% drop in purchase apps. The 4-week average for refis is now almost triple its level from the end of 2018. Despite the small pullback in the current report, purchase applications are up 19% from the end of 2018. Housing activity has now rebounded strongly following a sharp drop in 2018. New home sales are up 19%, existing home sales are up 10%, and new housing starts are up 21%.
Michael S. Erhardt, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP