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Record GSE issuance in 2010 may not last into New Year

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Fannie Mae and Freddie Mac issued more mortgage-backed securities in 2010 than ever before, but analysts believe there are too many hurdles for such highs to last. A report from analytics firm FTN Financial showed record agency-MBS issuance reached nearly $1.4 billion for the year (chart below), continuing a five-year streak of steady growth. The previous peak was in 2003, and as Wall Street began betting big and issuing more private-label MBS, GSE issuance dropped to nearly a decade low in 2005. But Jim Vogel at FTN said new issuance will be down in 2011. "Bond redemptions should be lower than 2010, bringing fewer new deals to replace called ones," Vogel said. Analysts at Metropolitan West Asset Management, a fixed-income investment firm, said new issuances will be hard to come by as fewer mortgages are originated. Home sales are still near all-time lows. Home prices continue to drag, and tighter credit requirements will constrict new lending. Those are the obvious handcuffs. One caveat MetWest points out is the large amount of prepayment cash flow from the Federal Reserve's MBS portfolio will not go back into MBS purchases. Analysts said depending on mortgage rates, this could be anywhere from $100 billion to $350 billion. With fewer buyers, someone has to pick up the slack if issuance from the GSEs is to remain at such high levels. "Who will pick up this added supply? This is where the forecast becomes murky," said MetWest U.S. fixed income analyst Mitchell Flack. Commercial banks, money managers and even overseas investors could begin taking over buying power from the Fed, especially if the government continues backing the agency MBS market. However, the market is still waiting on whether or not it will. "While there are several candidates, none has raised his hand yet," Flack adds. Jacob Gaffney contributed to this report. Write to Jon Prior.

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