MBS Weekly Market Commentary Week Ending 10/03/2020

The 10-year Treasury closed 2bps higher on Friday and is currently yielding 0.69%. The 30-year Treasury also increased 3bps to 1.48%. 10-year TIPS yield tightened 1bp to -0.94%.

MBA’s weekly mortgage applications index fell 4.8% in the week ended Sept. 25 after rising 6.8% in the prior week. Purchases were down 1.9% and refinances fell 6.5% after rising 3.4% and 8.8% respectively, in the previous week. The average 30-year fixed rate is 3.05% – the lowest in survey history, according to the MBA. Compared to last year, 30-year fixed rates are down 77bps. Freddie Mac’s 30-Yr FRM is currently 2.88%, down 2bps since last week. Also notable, pending home sales jumped 8.8% in August, following a 5.9% increase in July.

Cash-out refinances accounted for 23% of all refi loans in August. Originators have already begun to price in the refinance tax on longer lock periods and expectations of slower purchase times by aggregators. However, MBS pools with a higher percentage cash-outs have historically prepaid 10-15% more slowly than traditional refi loans, increasing investor appetite for the loan type. In the current refinance wave, we may see cash-outs begin to price more favorably due to investor appetite. The chart below shows refinances as percentage of total applications. Cumulative 5-day MBS relative performance improved last week, especially in lower coupons. Fannie 30-years exhibited a 12-tick outperformance of the 10-year Treasury, while other coupons outperformed the benchmark by 1-4 ticks. Ginnies were mixed as the 2 and 3.5 coupon also outperformed by 12 ticks and other coupons were relatively flat. Fannie 15-years performed 3-4 ticks better on the lower coupons and lagged 1-6 ticks behind the 5-year benchmark on higher coupons. On Friday, the Fed’s aggregate purchases of MBS totaled $5.3 billion (their lowest since 9/17), and buying was heaviest in the 2 coupon. The 3 coupon suffered the most for both 30-year Fannies and Ginnies due to it being unsupported by Fed buying and a currently high refinance incentive for borrowers in that note rate range.

On Wednesday, the GSEs announced they will extend the buyout timeline for delinquent loans from 4 to 24 months beginning 1/01/21. This will provide MBS investors with additional carry for loans that have become delinquent. Unfortunately, the GSE’s announcement may only marginally improve yield for MBS investors (by slowing prepayments of delinquent loans) because security issuers are often incentivized to buyout a delinquent loan as soon as possible. That’s especially true if the loan has potential for modification and re-pooling. Additionally, it is expected that Ginnie will follow suit with Fannie and Freddie on the buyout rule.

With election day fast approaching, the fate of Fannie and Freddie in the battle over conservatorship remains to be seen. If the incumbent party loses, reforms due to long-held convictions of Fannie and Freddie contributing to the financial crisis may mean a delay in the privatization of the entities. By the same token, the left’s platform centers around expanded access to healthcare and affordability of housing. The GSEs play a pivotal role in expanding that access so it is not a stretch to imagine the left expanding their reach by decreasing capital requirements or supplying the GSEs with additional funding to build their affordable housing outreach. An incumbent win, however, would likely result in the GSE’s return to shareholders, but with stricter capital requirements.

Key events this week:

  • Monday: September ISM Non-Manufacturing PMI figures
  • Tuesday: August’s JOLT’s job openings, September prepayment speeds
  • Wednesday: FOMC meeting minutes
  • Thursday: Initial Jobless Claims
  • Friday: Class A notification