With refinancings and cash-outs waning, net fixed-rate supply for this year is expected to be the lowest since 2000. However, JPMorgan Securities analysts still estimate roughly $10 billion in net MBS fixed-rate supply for the next month as the tail of first quarter refinancings are securitized. After this, net supply will probably drop again, they said.
With refinancings and cash-outs slowing down in response to rising rates, net fixed-rate supply is expected to stay exceptionally low. JPMorgan believes the rate of new home sales is not enough to continue stimulating growth in the fixed-rate MBS sector. The current rate of new home sales merely suggests a 2% annual growth in net fixed issuance.
ARMs already make up half of mortgage applications. Also, almost 60% of purchase applications are for ARMs. These factors lead to low growth in the fixed-rate market, analysts noted. Aside from these, the record level of new home sales only serves as the breakeven point, which will keep net fixed-rate supply stable. If new home sales slow, or if the percentage of ARM applications increases, there could be considerable negative net supply in the fixed-rate sector, JPMorgan said. Last year, this market grew primarily as a result of robust equity-take-outs during a period of record refinancing levels.
Also, at current rates, only about 6.5% CPR is associated with equity-take-out. In contrast, in 2003 equity-take-out represented about 20% CPR.
This means the equity-take-out contribution has decreased significantly by 75%, said analysts. "Since we do not expect an increase in equity-take-out, the ways to obtain significant net fixed-rate MBS supply are either through higher new home sales (unlikely), lower ARM share (possible, but unlikely), or a higher securitization rate (it is already at record levels)," researchers wrote.
Other supply trends were noted in research from RBC Dain Rauscher vice president Kevin Jackson. Jackson believes that much of the coupon stack is currently concentrated in the 5.0% to 5.5% coupon bucket, despite there being a 162% jump in 30-year 6.0% production from May to June. Also, 30-yearr issuance rose marginally while 15-year product decreased. Meanwhile, 15-year and 30-year MBS issuance decreased 54% since last August to $79 billion from $194 billion. Total Agency MBS issuance has dropped 54% since last August to $103 billion from $225 billion. Subprime origination volumes significantly increased and the market is currently saturated.