Limited MBS supply on tap for 2011, JPMorgan says
Looks like another year of limited supply of mortgage-backed securities in 2011, although new regulatory guidelines, extension risk and continued uncertainly regarding government-sponsored entities should keep demand down, as well, according to JPMorgan analysts. In the firm's securitized products outlook for next year, analysts expect supply of agency, fixed-rate MBS to rise to about $195 billion with nontraditional sources such as liquidations of delinquent loans providing most of the increase. Analysts forecast just $20 billion in MBS supply from new homes sales and cash-out refinancing next year, and modest tightening in mortgages vs. swaps is also expected. MBS issuance has all but dried up. Three years ago, a record level of commercial mortgage-backed securities were sold with about $230 billion or so issued. That figure is less than $10 billion so far in 2010. Residential MBS issuance has fallen even more to nearly nonexistent from almost $790 billion in 2006. A $237.8 million deal that Redwood Trust closed in the second quarter of 2010 is the only private-label RMBS transaction in two years. In nonagency RMBS, JPMorgan anticipates limited supply and attractive yields to narrow spreads further, as "investors increase their use of leverage." Continued runoff from the Federal Reserve portfolio of some $175 billion could impact supply as well, the analysts said. In early November, the Fed announced its decision to purchase $600 billion of Treasurys, which has become known as QE2. JPMorgan analysts said the Fed could begin repurchasing MBS rather than Treasury securities in an effort to stabilize the market if the spread between MBS and Treasurys "widened significantly." "The introduction of a fails charge in the mortgage market might remove one hurdle to the Fed restarting its mortgage purchases," the analysts said. "We believe the Fed is unwilling to distort the market further, especially in an environment where fail volumes have surged to record levels. However, if a fails charge caused fails to be cleaned up, this might make the Fed less unwilling to re-enter the mortgage market." A fails charge for Treasury securities allows the buyer of the debt to seek compensation when the seller fails to deliver the security in a timely manner. The number of MBS fails is at an all-time high, according to Financial Times. The number of delinquent loans being bought out of MBS pools by Freddie Mac and Fannie Mae also may impact supply next year, according to JPMorgan. The GSEs ultimately could sell up to $75 billion of MBS next year, the analysts said. JPMorgan expects banks to be net buyers of MBS next year despite conflicting pressures of "tepid loan growth and low absolute Treasury yields" that should indicate it's a good time to buy with the new capital requirements mandated by Basel 3 that have banks sitting on capital. "Putting it all together, we see a landscape where supply will be challenging for spreads," the analysts said. "Obviously, supply will match demand in the end, but as we look ahead, we find more force on the supply side." Write to Jason Philyaw.