Mortgage Pricing Insights (JUNE 2020)
[Pages:15]Mortgage Pricing Insights
JUNE 2020
? 2020 Optimal Blue, LLC and Andrew Davidson & Co., Inc. (AD&Co). All Rights Reserved.
Mortgage Pricing Insights: June 2020
CONTENT OVERVIEW
INTRODUCTION
? MORTGAGE PRICING INSIGHTS REPORT SUMMARY ? MAY MARKET OBSERVATIONS
MORTGAGE RATES
? MORTGAGE RATE SUMMARY ? MORTGAGE RATE SPREAD TO TREASURIES ? PRIMARY TO SECONDARY YIELD SPREAD ? PRIMARY MORTGAGE RATES VIA OBMMITM ? MORTGAGE RATE FORECAST
PRIMARY MARKET
? LOAN ORIGINATION VOLUMES ? ORIGINATIONS BY PRODUCT ? BORROWER CREDIT BY PRODUCT ? LENDER PIPELINE PULL-THROUGH ? BEST-EFFORTS VS. MANDATORY SPREAD ? WHOLE LOAN VS. MBS PRICING
SECONDARY MARKET
? MBS NOMINAL SPREADS TO THE 10-YR. TREASURY ? NOMINAL SPREAD & OAS HISTORY ? MBS CC OAS TO SWAPS ? 30-YR. MBS EMPIRICAL DURATIONS ? EMPIRICAL VS. IMPLIED VOLATILITY ? CORPORATE CREDIT MARKET HIGH-YIELD SPREADS ? GSE CONFORMING MORTGAGE CREDIT CONDITIONS
SOURCES & REFERENCES
? ABOUT OPTIMAL BLUE, LLC AND ANDREW DAVIDSON & CO., INC.
LEGAL DISCLAIMER
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Mortgage Pricing Insights: June 2020
INTRODUCTION
MORTGAGE PRICING INSIGHTS REPORT SUMMARY
Optimal Blue and Andrew Davidson & Co., Inc. (AD&Co), a leading provider of risk analytics and consulting for residential lending and MBS, have partnered to deliver the Mortgage Pricing Insights report. Released monthly, this report leverages proprietary data and analytics produced by both firms to provide a comprehensive view into mortgage finance across the primary and secondary markets. Each robust report includes updates to critical mortgage metrics like rates, yields, volumes, and prepayments, and also highlights the most relevant trends in the mortgage industry. For access to the data and analytics displayed herein, please contact Optimal Blue and/or AD&Co through the contact information provided on page 14.
MAY MARKET OBSERVATIONS
? The financial markets continued to edge away from the precipice of the worst stress since 1929. Federallyconnected mortgage markets improved in sync. Spreads moderately tightened and mortgage production and housing prices remain surprisingly healthy. However, historically wide spreads persist. Credit is tighter and non-government mortgage volume remains challenged.
? Primary and secondary mortgage markets continued to recover from the blowout in spreads to Treasury that occurred in mid-March, as a result of the economic turmoil caused by COVID-19. Treasury rates were unchanged during the month, while primary mortgage rates fell 8 bps to 3.23%. The historically wide gap between primary mortgage rates and the 10-year Treasury of 291 bps continued to manifest in mid-March (spread averaged 210 bps during Jan./Feb. `20) and contracted by just 9 bps in May to close at 258 bps.
? Historically low mortgage rates and loosening of COVID-19 restrictions drove originations higher in May. Total rate locks grew by 11% month over month (MoM), up nearly 75% from May 2019. Rate/term refinances showed no signs of slowing, with volumes over 3 times the prior years' totals. Conforming loans kept a dominant share of production with nearly 75% of new rate locks; up from approx. 60% pre-pandemic.
? Due to uncertainty stemming from the Federal forbearance policy, lenders continue to tighten credit. May saw average FICO scores climb again, with the largest increases in FHA and VA loans.
? Lender pull-through rates have settled in at historical averages near 80%, providing welcomed stability to pipeline managers. Loan pricing also improved relative to MBS in May, delivering gains for originators.
? The spread from primary mortgage rates to MBS yields in the secondary market fell 21 bps during the month but remains historically high. The nominal yield spreads of MBS to Treasuries in the secondary market ticked up 13 bps to 100 bps but remain well below the recent peaks that resulted from large-scale Fed purchases. MBS OAS levels widened modestly by 8 bps.
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Mortgage Pricing Insights: June 2020
MORTGAGE RATES
MORTGAGE RATE SUMMARY
March 20, 2020 was chosen to highlight effects of pandemic.
Source: Optimal Blue Mortgage Market IndicesTM (OBMMI TM) -- obmmi AD&Co Analytics -- ad-
MORTGAGE RATE SPREAD TO TREASURIES
The 10-year Treasury traded in a tight 10 bps range during May and finished the month up 1 basis point at 0.65%. After opening the month at 3.31%, the 30-year conforming mortgage rate dropped 8 bps. Oscillating between 255 and 271 bps, the mortgage rate spread to Treasury finished the month at 258 bps, well above its long-term average.
Rates Spread
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Spread
10-YR Treasury
OBMMI 30-YR Conforming Rate
3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50%
SPREAD TO TREASURY Open: 267 bps Close: 258 bps
Average: 262 bps Min: 255 bps Max: 271 bps
Source: Optimal Blue Mortgage Market IndicesTM (OBMMITM) -- obmmi
U.S. Department of the Treasury --
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Mortgage Pricing Insights: June 2020
MORTGAGE RATES ? Cont'd.
PRIMARY TO SECONDARY YIELD SPREAD
The mortgage rate spread to MBS remains very high, but it has tightened 33 bps from the 191-bps peak in mid-March. Originators report high profits per loan, though risk is elevated in several areas. Financing costs, hedging costs, and delivery uncertainty due to forbearance are all up; servicing values are way down, and loan-processing capacity is constrained by the pandemic.
Primary Secondary Spread
2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
PRIMARY SECONDARY SPREAD
Open: 179 bps Close: 158 bps Average: 169 bps
Min: 158 bps Max: 177 bps
Source: Optimal Blue Mortgage Market IndicesTM (OBMMITM) -- obmmi Bloomberg L.P. --
PRIMARY MORTGAGE RATES VIA OBMMITM
Federally-connected mortgage rates continued to decrease in May as primary market spreads tightened slightly from decades-wide levels, while Treasury bond rates remain at 100-year lows. Jumbo rates remain elevated due to a lack of secondary market liquidity for non-agency products.
5.0%
4.5%
Mortgage Rates
MONTHLY RATE AVERAGES 4.0%
(MoM)
30-YR. Conf.: 3.29% (-11 bps)
3.5%
30-YR. Jumbo: 3.50% (-14 bps)
3.0%
30-YR. FHA: 3.36% (0 bps)
2.5%
30-YR. VA: 2.98% (-5 bps)
30-YR Conforming Rate
30-YR Jumbo Rate
30-YR FHA Rate
30-YR VA Rate
Source: Optimal Blue Mortgage Market IndicesTM (OBMMI TM) -- obmmi
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Mortgage Pricing Insights: June 2020
MORTGAGE RATES ? Cont'd.
MORTGAGE RATE FORECAST
AD&Co forecasts spreads to tighten from the current wide levels. Mortgage rates will otherwise follow the path of Treasury rates; rising along the forward curve or falling based on the current curve.
RATE FORECAST (PSS) 3 months: 3.20% (155 bps) 6 months: 3.17% (152 bps) 12 months: 3.13% (148 bps)
Source: AD&Co Analytics -- ad-
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Mortgage Pricing Insights: June 2020
PRIMARY MARKET
LOAN ORIGINATION VOLUMES
Purchase rate lock volumes recovered from a slow April, growing by 34% MoM. This growth is a positive sign for the real estate market as the economy reopens. Refinance originations continue at a torrid pace as borrowers take advantage of the current rate environment and, in the case of cashout refinances, stow money away to compensate for potential loss of income in the near future.
Index Value Rate
450
4.6%
400
4.4%
350
4.2%
300 4.0%
250 3.8%
200
3.6% 150
100
3.4%
50
3.2%
0
3.0%
Purchase
Cash Out Refi
Rate/Term Refi
OBMMI 30-YR Conforming Rate
VOLUME CHANGES MoM, YoY
Purchase: +34%, +2% C/O Refi: -12%, +55% R/T Refi: +4%, +341%
Total: +11%, +74%
Source: Optimal Blue Mortgage Market IndicesTM (OBMMITM) -- obmmi Optimal Blue Market Analytics -- market-analytics
ORIGINATIONS BY PRODUCT
Product mix for new originations was little changed from April to May. Conforming loans maintain dominant market share as the 2020 refinance boom continues. Non-conforming product origination, primarily Jumbo loans, remain depressed due to widespread credit tightening due to the economic havoc created by the pandemic.
PRODUCT SHARE (MoM) Conforming: 73% (-106 bps) Non-Conforming: 4% (+41 bps) FHA: 10% (+49 bps) VA: 12% (-12 bps) USDA: 1% (+28 bps)
Source: Optimal Blue Market Analytics -- market-analytics
Product Share
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Conforming NonConforming FHA VA USDA
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Mortgage Pricing Insights: June 2020
PRIMARY MARKET ? Cont'd.
BORROWER CREDIT BY PRODUCT
Borrower credit tightened in May, continuing the trend followed since the onset of the pandemic. Lender overlays that were meant to minimize fallout risk from forbearance risk have kept low credit score borrowers on the sidelines. With no shortage of refi volume coming from lower risk borrowers, lenders are likely to maintain these higher standards.
AVERAGE FICO (MoM)
Conforming: 758 (+3) Non-Conforming: 766 (+4)
FHA: 672 (+5) VA: 720 (+6)
USDA: 701 (-1)
Source: Optimal Blue Market Analytics -- market-analytics
LENDER PIPELINE PULL-THROUGH
Originator pull-through rates converged for purchase and refinance loans in May at a benchmark 80% level. This is another positive sign after the heavy pipeline turmoil in March, which resulted from an excess of originations and the social distancing requirements caused by the onset of COVID-19.
PULL-THROUGH (MoM) Purchase: 81% (+152 bps) Refi: 81% (-184 bps)
Source: Optimal Blue Hedge Analytics -- hedge-analytics
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