But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The MBA Refinance Index is an important index to forecast mortgage activity and prepayments
The Mortgage Bankers Association (MBA) index of refinance activity measures application activity, not loans made. The Mortgage Bankers Association samples roughly 75% of all mortgage activity in the U.S., and its indices are key indicators for the real estate finance market and the homebuilders. The refinance index is released weekly, along with the mortgage applications composite index.
Housing economists use the MBA applications data to forecast numerous economic variables like existing home sales and new home sales. Originators will use the data for benchmarking their own activity. Mortgage REITs will use the data to forecast prepayment activity, which is a critical factor in mortgage backed security returns.
The MBA Refinance Index rose 28 basis points for the week ending April 19
Refinances increased while the average rate on a 30-year fixed rate mortgage dropped from 3.54% to 3.51% for the week. The 10-year bond yield fell slightly from 1.72% to 1.70%. Interest rates have been at these levels for some time, and every time rates drop, the effect on refinance activity becomes less and less. This effect is referred to as prepayment burnout, and future refinance activity may be driven more by credit availability than interest rates.
MBA reported the share of refinance applications remained steady at 75%. Most originators are anticipating a more purchase-driven market going forward and believe we have seen the lows in interest rates. That said, the Bank of Japan’s new program of quantitative easing may well drive Japanese investors into U.S. fixed income securities, which could drive rates lower.
Implications for Mortgage REITs
Refinancing activity affects prepayment speeds, which is a critical driver or mortgage REIT returns. Prepayment speeds are due to the fact that homeowners are allowed to pay off their mortgage early, without penalty; when interest rates fall, those that can refinance at a lower rate will do so. This is something that is good for homeowners, however, it isn’t necessarily a good thing for mortgage lenders, especially REITs. When homeowners prepay, the investor loses a high-yielding asset and is forced to re-invest the proceeds in a lower rate investment. This means lower returns going forward. A rise in prepayment speeds could be negative for REITs like American Agency Capital Corp. (AGNC), Annaly Capital Management, Inc. (NLY), Hatteras Financial Corp. (HTS), CYS Investments, Inc. (CYS), and Capstead Mortage Corporation (CMO).
© 2013 Market Realist, Inc.