The question many market participants are asking: Is there (backstop) support for the mortgage market from the GSEs and banks?
Recently, Lehman Brothers analysts estimated that given the easing in GSE capital surplus requirements, the agencies could increase their portfolios by as much as $160 billion to $200 billion over the next year.
On the bank side, demand has been very strong this year, JPMorgan Securities analysts said. They noted in a report last week that bank MBS holdings have risen by $90 billion in the first five months of this year.
The gains have come in large part from declines in residential loan holdings. JPMorgan analysts are less certain about future demand, as banks could find out that it is better for them to de-lever while maintaining conservative growth expectations. However, they noted that margins currently remain attractive and the lower funding could support demand for some time.
But, Deutsche Bank Securities analysts said in a report last week that they "see only modest buying support for the mortgage market coming from the GSEs and banks." While the near term could attract interest due to the wide spreads, analysts said that in the longer term, the lack of large long-term structural buyers could cause spreads to widen back out.
The Deutsche report points out that the $2.1 trillion non-agency mortgage-backed market is essentially dead and is no longer an outlet for new supply. "The existing securities and new production that would have been purchased through the non-agency securities channel now have to be cannibalized by the agency MBS or whole loan channels," analysts wrote. They said the sheer size makes it difficult for the GSEs and banks to absorb.
Deutsche estimates the agencies will add to their portfolios at a moderate pace of $100 billion to $200 billion in 2008 to 2009 and on an opportunistic basis since their capital is low on a fair value basis and there is still the risk of a re-intensification of the credit crisis.
In terms of bank demand, analysts said there is little evidence that there is much capacity for these financial institutions to absorb large mortgage purchases, especially as many have a significant amount of problem assets to work through.
In particular, analysts pointed out that while the securities portfolio has been the focus of write-downs, the loan portfolio has seen limited action - so far - and some components such as commercial mortgages and second-lien/home equity loans could see large losses. These sectors make up a larger share of bank assets than the securities portfolio, JPMorgan analysts noted.
As a result, a pickup in losses here could dampen the ability of banks to recover and increase their investments.
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