JPMorgan analysts: QE2 may open up MBS supply somewhat
JPMorgan Chase (JPM) analysts recommend remaining overweight in mortgage-backed securities versus swaps, while staying neutral on MBS versus Treasury securities. In a conference call discussing the firm's MBS research, analyst Matt Jozoff said any quantitative easing program undertaken by the Federal Reserve may open up supply for MBS somewhat, but organic supply will be muted over the next 12 months. The quantitative easing action the Fed is considering is designed to push yields lower on mortgages, agency bonds and Treasurys, while driving investors into riskier asset classes with the least amount of market disruption as possible. The Federal Open Market Committee meets again Nov. 2 and 3. Jozoff said mortgage prepayment spreads have "really separated the haves from the have nots," and lending standards may remain tight if the government decides to force a huge refinance program for mortgages held by GSEs. The analysts also said there is a risk that quantitative easing could push MBS spreads wider. Meanwhile, banks are sitting on $15 billion in capital but are having a difficult time figuring out what to do, according to the analysts. Because of the uncertainties around new regulatory initiatives, including Dodd-Frank, many banks are conserving capital, the analysts said. And Basel 3 has a liquidity premium that is also keeping banks from jumping back into MBS at a high rate, according to the JPMorgan analysts. The analysts said the moratorium on foreclosures in place in most states will push mortgage-loss severities higher because of extended timelines. JPMorgan continues to expect home prices to decline by 5% to 6% next year, but an extension of the foreclosure timelines could result in home prices falling by 10% to 15% in 2011. Write to Jason Philyaw.