On March 31, the Federal Reserve will end its MBS purchase program (MBSPP). Through March 24, the Fed had purchased $1.24 trillion toward its plan to buy $1.25 trillion.

The equivalent to 34% of the purchases was in FHLMC Golds 30- and 15-year fixed-rate MBS, 57% in FNMAs and 9% in GNMAs. Meanwhile, 96.5% of the purchases were in 30-years and by coupon, the largest purchases were in 4.5%s (44.5%) and 5%s (23.9%).

Since the beginning of the year through March 26, OAS have widened over 20 basis points on current coupons as the market began pricing in the Fed's exit. At the same time, nominal spreads have remained near historic tights as technicals have been very favorable.

Despite the loss of Fed buying, MBS spreads aren't expected to gap significantly wider. Deutsche Bank Securities economists said they don't anticipate large shifts in yield or MBS and credit spreads with the end of quantitative easing.

There is still ample liquidity within the market, the economists noted in a commentary, and the Federal Open Market Committee statement indicated its intention to keep rates low for an "extended period." They also said that there has been increasing participation from overseas, while carry remains favorable. JPMorgan Securities MBS strategists added that private investors are significantly underweighting MBS and they anticipate this group will begin to increase their weightings on the Fed's exit.

The sizeable amount of paydowns associated with Fannie Mae's delinquency buyout program over the next few months also provides a temporary replacement for the Fed. This buyout amount is estimated at more than $120 billion over the next three months. Most MBS analysts expect a large portion to be reinvested back into the sector, primarily in lower coupons and in 15-year MBS.

Prepayment Outlook

Fannie Mae finally issued some real clarity on its upcoming delinquency buyouts "in the interest of further transparency." In March, the mortgage company will buy nearly all of the loans that are delinquent as to four or more consecutive monthly payments and back MBS with 6.5% or greater passthrough rates. Following in April, they will purchase 6.0% and greater, and 5.0s and greater in May.

Fannie Mae speeds are expected to average 32 CPR for 30-year FNMAs, up from 18 in February. Specifically, speeds on 2008-2006 vintage 6.5s and 7s are projected to prepay in the 90 to nearly 100 CPR range; 5s through 6s are predicted to prepay in the 20 to low-30 CPR area. In April, speeds are seen flat on 5s and 5.5s, while 6.5s and 7s are seen slowing 60% from March expectations. Meanwhile, buyouts are projected to be concentrated in 6s - which are expected to increase around 150% from March. In May, 5s and 5.5s are the focus of buyouts and could see increases of over 100%.

The March Freddie Mac and Ginnie Mae 30-year MBS prepayment reports are projected to be uneventful. Freddie Mac speeds will show a dramatic slowing in March with their 120-day and more delinquency pipeline emptied - down 51% on average to 23 CPR, with subsequent months holding near that level.

Meanwhile, GNMA speeds are more reflective of the usual factors influencing speeds: a higher day-count in March at 23 compared with 19 in February and higher refinancings related to lower mortgage rates in February. Speeds are seen increasing around 15% in GNMAs in March, while April's are expected to be slightly lower as the number of collection days declines to 21.

Overall agency MBS pay-downs for March are estimated at near $120 billion, of which approximately $65 billion is projected to be from FNMAs. The reports are released on April 6.

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