Analysts find MBS buying opportunities re-emerging
As markets continue to search for an equilibrium during the ongoing crisis in Japan, Bank of America Merrill Lynch analysts found buying opportunities re-emerging in both residential and commercial mortgage-backed securities. The CMBS market stuck out more than any other sector. BofAML analysts anticipate commercial real estate prices to increase at 10% to 20% over the next two years – as long as between 4 million and 5 million jobs are added over the same time. The CMBS market experienced heavy sales over the past few weeks, and analysts believe this "provides an excellent entry point." The start of the year brought a rally in nonagency MBS, but prices dropped in the wake of recent foreclosure problems and the much discussed settlement between the 50 state attorneys general and the major servicers. While the outcome of the investigations could still take some time to emerge, the new rules will almost certainly force servicers to provide more loss-mitigation options, extending foreclosure time lines even further. BofAML analysts believe prices in nonagency MBS have dropped enough to provide "good upside" in price potential, even in option-adjustable rate mortgages. The Japan crisis forced many investors to quality, driving Treasury yields lower. This also pushed spreads in agency MBS wider, but BofAML analysts believe investors can capitalize on this movement. They also brushed aside refinancing risk to be "extraordinarily muted." JPMorgan Chase (JPM) analysts were notably more cautious and recommended waiting until the market volatility settles after Japan. But they seemed more worried about the extended time lines from AG settlement. Analysts estimate investors in nonagency MBS could see up to $7 billion in incremental losses if the foreclosure time line is extended as much as six months. The Securities Industry and Financial Markets Association warned the AGs last week of similar unintended consequences to their requirements. Still, BofAML analysts remain optimistic that buying opportunities are appearing even as clarity from Japan and regulators remains elusive. "Taking the view that Japan does little to alter the path of economic recovery in the U.S., we find that attractive value has emerged in the past few weeks across the space," analysts said. "For those who missed the rally, or for those who want to re-engage, the opportunity for upside has now re-emerged." Write to Jon Prior. Follow him on Twitter @JonAPrior.