With the recent downward trend in refinancing applications, MBS analysts are looking once again at originator capacity issues to see whether the tapering activity has caused the pipelines to clear.

Analysts from Countrywide Securities Corp. recently focused on this particular issue.

"Specifically, the question arises whether the capacity constraints and bottlenecks experienced during the refi boom period have eased, and what impact these factors currently have on consumer mortgage rates," analysts from the firm wrote.

According to Countrywide, anecdotal experience suggests that while capacity constraints are currently not as much of an issue compared to four to five months ago, there is still very little in the way of slack. These high levels of capacity utilization can be attributed to both the relatively healthy levels of refinancings and strong purchase activity.

The firm said that continued strains on capacity are most evident in the current wide spread between consumer mortgage rates and levels in the capital markets. The report showed that the spread between the Freddie Mac 30-year survey rate and the Fannie Mae 30-year Current Coupon rate - which serve as a good indicator of margins at the origination level - are now wide compared to historical levels, although it is below the widest levels seen late last year.

The above observations have interesting implications. One is the fact that capacity limitations have tended to boost mortgage rates. When applications volume exceeds capacity, the market tends to be less competitive, which is reflected in incrementally higher rates.

Countrywide also suggests that if the capital markets remain range-bound and refis continue to trend lower, the drop in refis would translate into diminished capacity constraints, which could cause consumer mortgage rates to decline. Lowering capacity limits would push lenders to make mortgage rates more competitive, thus pushing rates lower, and bringing people in.

The firm points out that the spread between the survey rate and the current coupon rate is currently around 50 basis points. If the spread moved back to its long-term average of about 29 basis points as market competitiveness increased, consumer rates would likely drop, even in the absence of a change in capital market rates. Given the present cuspiness of the mortgage market, this would likely cause a subsequent pick-up in refi activity.

"Therefore, there are some self-correcting forces at work that may give boost to future refinancing activity even if capital market prices and yields are relatively stable," analysts wrote.

Countrywide also noted that a drop in purchase activity, which currently comprises 60% of applications, might also be having an impact. With purchase activity comprising a sizeable chunk of application activity, a drop in purchase activity (either through general market factors or seasonal effects) would also help relieve capacity constraints, which would also put downward pressure on rates.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.