30yr Fixed Market Share Drops To 2003 Levels

Loan agents and investors alike are seeing a drop in traditional 30yr mortgages and both a huge increase in 15yr paper and also a slight increase in ARM production. And stats bear this out:

The share of 30-year MBS in total Fannie & Freddie fixed-rate MBS issuance has declined gradually from 80%-87% in early 2009 to only 59%-64% in the second half of 2011.

In fact, the recent percentage of 30-year MBS issuance in total Fannie and Freddie fixed-rate MBS is similar to the levels last seen in 2003.

Yes, the production of shorter maturity products (10, 15, or 20-yr) picks up in a refi environment, but it has been somewhat of a surprise their percentage issuance has approached the levels last seen in 2003 (even after considering the fact that GNMA issuance picked up a lot and most of the GNMA issuance is in 30-year MBS).

So what is going on out there now versus 2003?

First, borrowers refinancing mortgages these days have been in their current mortgage for 4-5 years versus only 1-2 years in 2003. The more seasoned borrowers have a higher propensity for refinancing into a shorter maturity mortgage, all else equal.

Second, Fannie & Freddie are providing added incentives to refinance into a shorter maturity mortgage by eliminating loan level price adjustments (LLPAs) when a borrower refinances into a shorter maturity mortgage.

And lastly, the difference between shorter maturity and longer maturity mortgage rates is higher now than in 2003 although the Treasury and swap curves are somewhat flatter.

The financial and political arenas are still reeling from news that Rod Blagojevich won’t be allowed to use hair dye in his Colorado prison. Nonetheless, we will move forward or at least in some direction. The 10-yr T-note closed Friday at 2.24% and holding near there this morning, but mortgages didn’t do well prompting one trader to note: “The MBS market is about as constructive as my mother-in-law at the dinner table.”

We’ll see how supply (originator selling & hedging) and demand (by the Fed and others) stack up this week, but we have a fair amount of U.S. economic data: Calendar | Preview Each Stat.