Fixed Income Recap

Mortgage Refinance Applications Highest Since 2003
The Mortgage Bankers Association reported a 62% increase in refinance applications for the week ending December 19th to 6,758 applications, on a seasonably adjusted basis, from 4,156 the week prior. However, the number of actual refinances resulting from the applications remains to be seen.

The capacity for banks to lend is very constrained, 1 in 5 homeowners are under water on their mortgage (although appraisals may be waived later), and the market’s appetite for securitized mortgages remains thin. These factors point to a refi-boom less than that of 2003, where applications peaked at 9,977 the week ending May 30th.

Nonetheless, Bloomberg consensus speeds, which are the benchmark models for estimating individual prepayment characteristics of a mortgage backed security, have been revised aggressively, and likely have farther to go. As refinances increase and prepays speed up, MBS shortens as principle is paid back to the bondholder sooner.

As I have noted before, times of heavy refinancing reward those who avoid high coupon (high premium) MBS and stick to dependable structure in CMOs. We have been selective in buying MBS and have stayed away from this type of paper.

Cliff J. Reynolds Jr.
Junior Analyst