Monday Morning Cup of Coffee: Mortgage app decline alarms analysts

 Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.

The slowdown in mortgage purchase applications is weighing on analysts. Mortgage purchase apps have faltered, and that limits upside risk for mortgage rates, according to the analyst team lead by Chris Flanagan at Bank of America/Merrill Lynch.

This last week's sharp drop in the Mortgage Bankers Association purchase index was reminiscent of the early 2014 drop. Remarkably, purchase application volume is at the same level of early 2014, even though mortgage rates are more than 50 basis points lower.

“Recent bear steepening of rates should give way to flattening, driven by front-end weakness due to looming Fed rate hike. The agency basis still has more tightening potential, as supply and prepay risk subside,” Flanagan wrote in a client note.

“We continue to like down in credit, lower dollar priced non-agency RMBS. We think the reduced risk layering in CRT is often overlooked. We revisit our risk score which captures risk layering,” they write.

Flanagan says that strength in the labor market should lead to a mid-year rate hike by the Fed, but he does not see that strength translating into increased demand for purchase mortgages.

“This leads us to reiterate the view we held for most of 2014: housing is not strong enough to absorb meaningfully higher long-term interest rates, including mortgage rates. As a result, we believe longer-term rates remain biased to the downside, even from today's current low levels,” he says. “Upward momentum could drive long-term rates modestly higher over the near term, but, in our view, the fundamental reality of weak mortgage demand will likely halt the rise before long. We think the chances are good that rates settle into a range over the next few months, similar to the range trade on the 10yr in February-April 2014, and that we are currently near the high end of the range. Similarly, we think the recent yield curve steepening is likely to give way once again to a flattener; we still believe the 2yr-10yr spread will be close to zero by mid to late 2016. We are not fazed by the recent short term steepening; the bull flattening was overdone.”

read more: http://www.housingwire.com/blogs/1-rewired/post/33018-monday-morning-cup-of-coffee-mortgage-app-decline-alarms-analysts