FRM Update

October 10, 2017

The mortgage market continues to trade in a tight range with minimal changes in yields or yield spreads last week. Mortgage rates increased for the fourth consecutive week. 15- and 30-year fixed mortgage rates have increased 17 and 19bps over the last month. Mortgage applications fell for the third consecutive week, falling 0.4%. MBS prepayments speeds in September slowed as expected, a complete reversal of the prior month’s increases. Technical factors were the main driver behind prepayment differentials MoM. October prepayments are expected to increase slightly, falling somewhere between this month’s and last month’s speeds. For additional prepayment commentary and charts, please see our September Prepayment Commentary.

MBS

• Mortgage yield spreads were unchanged to slightly wider last week:
  • 15-year and 30-year MBS yield spreads ended the week unchanged to 2bps wider to Treasuries and swaps

• Curve slope measured by 2- and 10-year Treasuries steepened 1bp last week from 84bps to 85bps.
• Investors were active last week in recently issued and new production 15yr MBS, primarily in 3% and 3.5% coupons and in 15yr MBS backed by relo collateral.
• Investors were also active in seasoned 30yr MBS, primarily in 3.5% and 4% coupons and in seasoned 20yr MBS, primarily in 3.5% coupons.
• A combination of higher yield versus agency bullets and deference to convexity inspired activity in multi-family FNMA DUS with 7yr maturities and in uncapped floating rate Freddie K’s, taking advantage of higher yield opportunities in LIBOR rates.

CMOs

Trading in CMOs started out slow, but improved the latter half of last week, as portfolio managers started the fourth quarter. 2.5% yields are available with the 5-year Treasury yield increasing over 20bps over the last month. CMO spreads tightened a couple of basis points last week. CMO investors were active in various types of CMO structures including 3.5% squared sequential and VADM structures backed by conventional, Jumbo, and Relo collateral.

Mortgage Rates and Refinance Activity

• Mortgage rates increased for the fourth consecutive week. 15- and 30-year fixed mortgage rates have increased 17 and 19bps over the last month.
  • 15-year mortgage rates rose 9bps to 3.11%
  • 30-year mortgage rates rose 6bps to 3.86%
• 15- and 30-year fixed mortgage rates have now fallen 13 and 20bps year-to-date; however, mortgage rates are 43bps higher than this time last year.
• Mortgage applications fell for the third consecutive week. Applications for the week ending September 29 fell 0.4% on a 1.0% increase in purchase apps and a 1.8% drop in refi apps.
• The MBA Refi Index continues to be range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, it quickly dropped back closer to its six-month average of around 1400.

September Prepayment Speeds

MBS prepayments speeds slowed as expected, a complete reversal of the prior month’s increases. Again, technical factors were the main driver behind prepayment differentials MoM, as the housing market and mortgage rates have been locked in a near stagnant range for several months. For thirty-year MBS, both FNMA and FHLMC decreased 10% overall. September had three less closing days than August, which accounts for a prepayment decrease of around 13% for the month of September.

October has one more business day than September, and mortgage rates stayed in fairly close proximity to prior months during the pertinent application period. Prepayments are therefore expected to increase slightly, falling somewhere between this month’s and last month’s speeds.

Hurricanes Harvey and Irma should influence prepayment trends in a significant way for the affected regions for the next several months, while exerting very minor impacts on overall speeds.  For additional prepayment commentary and charts, please see our September Prepayment Commentary.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks