A dearth of reinvestment in mortgage-backed securities may impact valuations because of higher levels of mortgage originations needed to sustain the market. The void is due to the federal government holding nearly 40% of the MBS market through the Federal Reserve, Department of Treasury, Fannie Mae and Freddie Mac, asset-management firm Smith Breeden Associates said in its bi-monthly commentary. "A large percentage of mortgage investors are not re-investing paydowns back into mortgages, which is highly atypical and will result in increased levels of originations having a substantive impact on valuations," Smith Breeden analysts said. Last month, the Fed announced plans to put maturing MBS proceeds into Treasurys rather reinvesting them back into MBS. Smith Breeden analysts also said while a "mega-refi' won't hurt non-agency MBS cash flow, it "would do major damage to the mortgage finance complex, and non-agency RMBS would certainly be caught in the crossfire of widening spreads." While the Mortgage Bankers Association refinance index rose for August, it's still below peak levels of earlier this decade: "But we have seen real widening in the spreads between MBS and swaps and Treasuries… and notable underperformance of higher coupons versus lower coupons." the analysts said. Smith Breeden also plans to "take advantage of further spread widening to add to positions." New-issue CMBS was light in August with just three deals worth $2 billion total getting to market. A few years ago, most CMBS deals getting sold were each $2 billion, analysts said. Still, the somewhat reopening of the market "has been met with very strong demand," according to Smith Breeden. Write to Jason Philyaw.