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Wells Fargo gives 3 predictions for the mortgage bond market

Big news concerning the future of Fannie and Freddie

Wells Fargo
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Structured products analysts at Wells Fargo (WFC) released their voluminous outlook on securitization going into 2014. On the whole, the economic backdrop still remains strong, but the market appears clouded by policy risk and regualtory uncertainty. Nonetheless, the structured finance analysts at Wells continue to hold a constructive view of the macroeconomic outlook.

They expect up to a 3% annual growth to GDP, which is marginally above consensus.

And while corporate bonds outperformed structured products last year, they expect that to change going into 2014. The only exception to the structured market outperform rank they give to the private bond market is that is doens't apply to the residential mortgage asset class.

Here are the three big issues they see impacting the residential mortgage-backed securities market this year. Some of these the bond market will see coming, others maybe not as much.

Fannie Mae and Freddie Mac will halve gross issuance

Perhaps the biggest change will be a combined gross issuance of mortgage-backed securities from the government-sponsored enterprise at just under $800 billion. That half of what they issued in 2013 and reflective of just how weak purchase originations will be this year. The chance of GSE reform is little, they said: "The Corker-Warner bill is gaining traction, although we continue to believe it would be at least five to seven years before any significant change to Fannie and Freddie."

Benchmark changes will be moderate or modest

Basically, the analysts say some benchmark rates will move, albeit slowly, primarily upward. Home prices will appreciate, but only by 3%. Interest rates will remain flat or go up, and will hover between 4.5% to 5%. That's a little off from predictions on rates over at the Mortgage Bankers Association.

The private mortgage bond market won't come back

The appointment of Mel Watt to led the FHFA is an elevated policy risk. And his recent decision to suspend the g-fee hikes is a disincentive to the private market. At any rate, the Wells Fargo analysts also say, despite stable credit performance, "we expect new issuance to grow modestly to $15 billion–$20 billion," they said. "Spreads to remain relatively stable for legacy bonds, but we anticipate some widening in new issue."

Note: Greg Reiter is the head of residential mortgage-backed securities research at Wells Fargo and is credited in the outlook report as the author who provided most of the above analytics.

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