By Isobel Kennedy

NEW YORK (MNI) – The New York Federal Reserve said it purchased
$4.35 billion agency mortgage-backed securities in the week ended
November 30.

The largest purchases in the latest week were in Fannie Mae and
Freddie Mac 30-year “to-be-announced” securities with 3.50% coupons for
December delivery. Those buys totalled $1.90 billion.

The next largest purchases consisted of $1.40 billion Fannie Maes
and Freddie Macs with 4.00% coupons for December delivery.

This week’s purchases were less than last week’s purchases of $7.25
billion because November 23 was the Thanksgiving Day holiday and the
Friday after Thanksgiving was an early close with very limited trading
flows.

Since November 14, the NY Fed has purchased $16.65 billion agency
MBS out of its estimated $28 billion for this 30-day period.

As 30-year mortgages hovered around 4.00% to 4.10% in November, the
Fed’s expected prepayments from its portfolio rose to $28 billion for
the period November 14 to December 12 from $22 billion in the October 14
to November 10 period.

On December 13, the Fed will announce how many MBS it expects to
buy in the 30-day period beginning December 14.

The estimated prepayments for the December 13 announcement could
come in closer to the $28 billion again but looking ahead the
prepayments could drop off for a few reasons.

The MBA’s Refinace Index decreased 510 points or 15.3% to 2,834 in
the week ended November 25 while the seasonally adjusted Purchase Index
was only down 0.8%.

The Refinance share of mortgage activity fell to 73.9% from 75.8%
in the previous week. This is the lowest level of refinancing activity
since July 2011.

On a seasonally adjusted basis, the MBA’s Composite Index fell
11.7% in the week ended November 25.

Market sources expressed surprise at the deep drop in the Refinance
Index since 30-year mortgage rates have hovered in the 4.00% to 4.10%
over the last month.

The weekly Refinance Index has surprised the markets with
back-to-back drops in the last two weeks and that could indicate that
“burnout” is occurring, market sources said.

In other words, anyone who was able to refinance at 4.00% has
probably already done so.

Head of mortgage strategy at FTN Financial, Walter Schmidt, says
Wednesday’s drop in the Refinance Index makes it the lowest reading
since July when 30-year mortgage rates were closer to 4.50% and 4.60%.

But there will likely be a lag before the drop in refinancings
seeps into prepayment speeds.

“Since the previous peak 3,967 (Refinancing Index) occurred just
four weeks ago, the current elevated speed profile of the Agency MBS
market is essentially baked in for the next factor report due out next
Tuesday,” Schmidt said.

“But with a typical 6-8 week lag between refi applications and the
realization of prepayments in the monthly factor report, speeds should
start to abate rapidly in subsequent reports,” Schmidt adds.

Another reason prepayments could drop in the future concerns
seasonal factors. With the holidays approaching and the winter setting
in, market sources say home buying drops off and does not pick up again
until the Spring.

On September 21, 2011, the NY Fed said it would begin reinvesting
prepayments from its mortgage portfolio back into agency MBS. Prior to
that, the Fed was taking that money and putting it into the U.S.
Treasury market.

The Federal Reserve’s current position in agency mortgage-backeds
is around $840 billion in delivered securities. It peaked at $1.25
trillion in March 2010 when it ended its outright MBS buying program.

Since then the portfolio has decreased due to monthly prepayments
whose proceeds were invested into the Treasury market for a period of
time. Since September 21, the Fed has been reinvesting those prepayment
proceeds back into the mortgage market in order to keep the MBS
portfolio from shrinking and to offer support for the housing market.

But there is only so much the Fed can do as the housing market
facing obstacles that are beyond the Fed’s control.

One major factor is that home prices continue to decline.

This week the September S&P Case-Shiller 20-city home price index
fell 0.6% MOM for -3.6% YOY.

While Atlanta, Las Vegas, Los Angeles, San Francisco, Seattle and
Tampa recorded lower annual declines in September compared to August,
Detroit and Washington DC were the only areas to post positive annual
rates of +3.7% and +1.0%, respectively. Detroit has now recorded three
consecutive months of annual gains.

Also this week, CoreLogic’s Q3 negative equity data showed that
10.7 million, or 22.1%, of all residential properties with a mortgage
had negative equity at the end of Q3. This is down slightly from 10.9
million properties, or 22.5%, in the second quarter.

An additional 2.4 million borrowers had less than 5% equity,
referred to as near-negative equity, in Q3.

On a brighter note, October NAR pending home sales index rose 10.4%
to 93.3 vs. 84.5 in September.

This represents +9.2% YOY and NAR says rising contract activity is
a hopeful sign that buyers are taking advantage of excellent
affordability.

** Market News International New York Newsroom: 212-669-6430 **

[TOPICS: M$U$$$,MMUFE$,M$$AG$,MN$MO$,MAU0B$]