Mortgage Stats

Refinance Volume Muted

mortgagestats | 08 February, 2010 19:35

Refis from Record-Low Rates Muted, But Effect Is 'Not Zero'

By Bonnie Sinnock

Rates continue to fall to never-before-seen lows but this refinancing wave is unlikely to match the size of the one seen when rates last fell to new depths earlier this year.

"The impact is now smaller," said Art Frank, director and head of mortgage-backed securities research at Deutsche Bank Securities. "[Underwriting] standards are tighter and [industry] outreach is diminished."

The Mortgage Bankers Association's refinancing index, a measure of loan application activity, has been around 3000 lately, compared to 6000 when record lows first hit in the spring, he noted. The refi index hasn't even reached 3500 since the beginning of June, he added.

The latest prepayment numbers last Thursday at press time had not been released but Mr. Frank was anticipating only a modest pickup.

He noted that refi-driven prepayment surges in 5 and 5.5 coupons would likely be scarce but the effect of delinquencies on 6s and 6.5s in terms of modifications and buyouts of delinquent loans could be a "bigger concern" in early 2010.

While the effect of recent record-low rates may be less of a driver in the context of prepays than loan performance, and is not expected to be very large, it is "not zero," Mr. Frank noted. (However, where rates are headed - like the prepayment number - was somewhat unknown at the time of this writing. Key employment numbers that could determine that were set for release last Friday after this column went to press.)

As previously noted in this column, rates are expected to rise early next year if the Fed stops buying agency MBS by the end of the first quarter. But other investors are likely to step in as it departs and ensure the rise is a gradual one.

On a recent trip to visit Asian accounts, Mr. Frank said opinions on agency MBS were varied with some continuing to buy while others expressing the opinion spreads have been too tight and have been waiting for spreads to widen out with the Fed's planned departure. For several players, concerns about the future of Fannie Mae and Freddie Mac have "diminished significantly" in contrast to what was seen just before the two agencies were placed into government conservatorship, he said.

For the time being, real estate investment trusts investing in agency MBS may be selectively attractive, according to a equity research report by Sandler O'Neill and Partners LP, which is initiating coverage on the sector.

Even though a rally in the sector may be "running out of steam" it is considered "attractive, particularly for conservative investors seeking to earn low- to mid-teen returns," associate director Michael Taiano and associate Michael Sarcone said in the report.

"We believe the favorable environment will likely continue into next year but are concerned that the hint of a Fed tightening cycle and/or the phase-out of the Fed's MBS purchase program could deflate the stocks' upward momentum in 2010. Consequently, we recommend being selective within the group and buying those REITs that have more balanced models and cheaper valuations," they added.

The company covers six agency mortgage REITs and has "buy" recommendations on two of them: Annaly and Anworth, primarily based on the former's "more diversified and balanced model, along with its track record of managing through various interest rate cycles" and the latter's "more defensive strategy toward higher rates" as well as the fact that "its valuation is the cheapest among the group."

Sandler O'Neill has "hold" recommendations on the other agency mortgage REITs it covers: Capstead, MFA, American Capital Agency Corp. and Hatteras Financial Corp.

In other news, MBS investor Ellington Financial LLC filed a preliminary prospectus for an initial public offering. It is managed and advised by former Kidder Peabody head MBS trader Michael Vranos' Ellington Management Group Inc. Mr. Vranos was raised in Ellington, Conn., and has managed mortgage assets through some challenging market cycles.