The housing rebound underway is lifting home sales volume and prices, leading to a greater supply of agency mortgage-backed securities.
Furthermore, thanks in part to a stronger housing recovery, the organic net growth of the agency market has exceeded market expectations so far this year.
Agency MBS net issuance is expected to hit between $50 billion and $70 billion based on higher home sales, greater net supply from existing home sales and greater flows from non-agencies and adjustable-rate mortgages into agency-fixed MBS, JPMorgan Chase (JPM) said in its latest report.
Fixed-rate net issuance was $54 billion in the first quarter of 2013, compared to roughly $70 billion during all of 2012.
"We had expected net shrinkage in the agency MBS market over this year, largely attributable to an expected increase in loan retention by banks," said analysts of JPMorgan.
However, stronger housing boosted net supply in several ways.
For instance, the gained momentum in housing is lifting home sales, both new and existing units.
In 2012, new home sales increased by 60,000 units year-over-year, the report said.
"In our view, an incremental increase of equal or greater magnitude is in order this year. Every 100,000 units in new home sales translates to about $20 billion to $30 billion in additional net supply, the majority of which are agency fixed loans," the analysts explained.
Meanwhile, home price appreciation translates into a greater rate of net supply from existing home sales.
For example, at 5 million units per year, a 7% increase in home prices is equivalent to roughly between $50 billion and $60 billion, the report noted.
Furthermore, persistent low rates and rising home price appreciation aids the flow of non-agency refinancings to agency refis.
In the Fannie Mae and Freddie Mac space, the Home Affordable Refinance Program allows underwater borrowers to refinance regardless of loan-to-value ratios.
Outside of the government-sponsored enterprises and the Federal Housing Administration, the ability to refinance is a function of LTV and thus is home price appreciation dependent, the report explained.
"As more homeowners claw their way back into positive equity, refinancing for non-agency to agency migration has been a constant theme since the onset of the credit crisis," the analysts said.
In 2012, the agency market grew once again by $70 billion, coinciding with the first year-over-year increase in home prices since the credit crisis.
Thus, this pattern looks to repeat itself this year as rates continue to stay low.
"Based on expanding new and existing home sales, more expensive purchase loans, and the migration from non- agencies and ARMs to agency fixed rates, we can tally up incremental year-over-year net supply of as much as $150- $170 billion. However, we continue to hold the view that increased bank loan retention can subtract as much as $100 billion from fixed rate supply," the report concluded.