Ain't No Cure for the Summertime Mortgage Blues


Most market players were taken aback by how badly mortgages fared during the first few trading days of last week, and the dim outlook for mortgage-backed securities continued through the week's end amid major spread widening and a dearth of buyers looking for paper.

"The technicals for mortgages are so very negative now, even though the fundamentals are pretty good," said Art Frank, head of mortgage research at Nomura Securities. "We widened out to 170 basis points over, and we've now widened 49 basis points since the middle of May."

On May 12, the interpolated current coupon was 118 to the 10-year, Frank said, while it closed at 167 over during the middle of last week.

Some traders did mention, however, that investors can get paid unusually well right now for getting into slightly less liquid sectors.

Across the 6% to 8% liquid coupon spectrum, sources generally reported that Ginnie Mae paper was cheap to Fannies.

"Ginnie Mae-2 6's are absolutely screaming cheap," said one source. "They're 28/32 behind Fannie [Mae] 6's and have the same weighted average coupon."

By the end of the week, the benchmark five-year swap spread, looked at by mortgage investors as a measure of risk in the market, widened seven basis points to 101 basis points, the widest in more than a decade.

"Trading volume is quite low, dealer inventories are light, but probably appropriately so," said John Carson, head mortgage-backed securities trader for Morgan Keegan. "Spreads continue to widen along with the swap market."

However, Carson points out that later in the week, for the first time, there was reasonably heavy buying from some large money accounts in pass-throughs.

Mostly Ginnie Mae paper - but also dwarf 7's and some of the current coupon piece - spurred buying that held spreads in relative to swaps.

"Part of mortgages' problem is perceived extension risk," Carson added. "So the rise in mortgage rates is well expected. We've seen Treasury rates rising steadily since January, so the fact that it would eventually choke off refinancing is reasonably expected."

According to market sources, the spread blowout of this summer that was unanticipated two months ago has reached all of the debt sectors. Even the mortgage-related asset-backed market, which has had some of the best value in trading during the last few weeks, is trading extremely thin in the secondary market, market insiders say.

"It is such a thin market," said one trader. "To get a competitive bid, an investor almost has to go to the dealer he bought it from."

In other market news, sources report that St. Louis-based Mercantile Bank, N.A., which was recently acquired by First Star Bank of Milwaukee, has left the MBS business and disposed of its MBS inventory.

A spokeswoman at Mercantile said that the bank's decision to get out of the mortgage business was simply part of the acquisition process by First Star.

On the commercial mortgage side of the market last week, Chicago-based real estate investment trust General Growth Properties Inc., a manager of more than 125 malls nationwide, announced that it expects to complete the refinancing of $1.4 billion of debt on its shopping malls in about 75 days - one of the biggest transactions ever, company officials say.

John Bucksbaum, chief executive of the REIT, is separately in talks to buy five shopping malls, he said. Additionally, the company stated that it plans to sell approximately $500 million in commercial mortgage-backed securities late next week.

Another $600 million of mortgage bonds will be marketed to investors after Labor Day, with an additional $300 million to be sold sometime in October.