FRM Update

October 16, 2017

Mortgage rates and Treasury yields fell last week with unchanged to slightly tighter mortgage yield spreads even as the Fed is expected to begin the unwinding of their balance sheet this week. Mortgage applications fell for the fourth consecutive week, falling 2.1%. Mortgage rates fell last week, marking the first weekly decline in over a month. No housing reports were released last week; however, this week’s calendar is a housing-heavy week with reports on homebuilder confidence, new starts and permits, and existing home sales.

MBS

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

• Curve slope measured by 2- and 10-year Treasuries flattened 7bps last week from 85bps to 78bps.
• Investors were active in seasoned 30yr MBS, primarily in 3.5% and 4% coupons.
• Investors were also active last week in recently issued and new production 15yr MBS, primarily in 3% and 3.5% coupons and in MBS backed by relo collateral.

CMOs

Trading in CMOs was on the slower side during the holiday shortened week. Consistent with MBS and other spread products, CMO spreads were unchanged to slightly tighter last week.  CMO investors were active in various types of CMO structures including front end sequential and PAC and VADM structures offering extension protection backed primarily by conventional and Relo collateral. Depositories continue to focus on stable structures with 3- to 6-year average lives.

Mortgage Rates and Refinance Activity

• Mortgage rates fell last week, marking the first weekly decline in over a month.
  • 15-year mortgage rates fell 10bps to 3.01%
  • 30-year mortgage rates fell 9bps to 3.77%
• 15- and 30-year fixed mortgage rates have now fallen 23 and 29bps year-to-date; however, mortgage rates are 31 and 30bps higher than this time last year.
• Mortgage applications for the week ended October 6 fell 2.1% driven lower by another weekly decline in refinancing activity, while purchase activity was essentially flat. The refi index declined 4.2% last week and has now dropped in each of the last four weeks. The last weekly increase for the refi index was the 8.9% jump for the week ended September 8 when the 10-year Treasury yield touched a new intraday, post-election low of 2.01%. From that recent bottom, the 10 year rose 33 bps to average 2.34% in the week covered by this report, and mortgage rates have increased almost 20bps since September 8.

• 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 has fallen in each of the last four weeks to slightly below the YTD average of 1361.

Housing

No housing reports were released last week; however, this week’s calendar is a housing-heavy week with reports on homebuilder confidence (Tue), new starts and permits (Wed), and existing home sales (Fri). Homebuilder confidence is expected to hold flat at 64 in October (a strong level historically). September’s housing starts and building permits data are both expected to show weak monthly results. September’s existing home sales data is expected to show a 0.9% MoM decline in sales, the sixth month of declines in 2017 and the fourth consecutive drop.

Dan Stimpson, CPA

Senior Vice President

Vining Sparks