With refinancing activity expected to peak in the fourth quarter, the decline in Ginnie Mae MBS is likely to accelerate, further exacerbating the supply/demand "imbalance" in the sector, said analysts from JPMorgan Securities in a recent report.

The report stated that year-to-date, this supply/demand imbalance has reached well over $34 billion (not including overseas purchases). Over the same period, analysts noted that there was a $22 billion net decline in outstanding GNMA securities because of refinancings from FHA to conventional loans. Most of the decline was from the GNMA I program, while the outstanding amount of GNMA IIs has remained steady. With heavy paydowns expected in the fourth quarter due to the current refinancing boom, monthly outflows from GNMA securities will exceed inflows - accelerating and intensifying the pace of decline in the GNMA sector.

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