April may produce the highest monthly gross MBS supply for 30-year collateral ever, and May could possibly top that figure, said analysts at Credit Suisse First Boston last week.
As of April 16, almost $26 billion has already been issued in FNMA 30-year collateral. The bank is expecting April's 30-year conventional production to be roughly at least $50 billion, exceeding the previous high in January 1999, when about $45 billion was issued.
However, CSFB said that 15-year and GNMA production should be well below their early 1999 heights. The bank is anticipating around $11 billion in conventional 15-year for April.
"We didn't see a big decline in the Refi Index this week despite the sell-off," said David Montano, director or MBS research at CSFB. "So we expect big prepays again in April and continued heavy production in May."
The faster prepayment speeds which the market is now seeing is not due to increased refi efficiency, Montano said, but is caused by changing loan characteristics.
Loan balances, for instance, are larger by about 10% compared to where they were in 1998, thus creating more incentive to refinance.
"That would effectively increase the spreads for the same level of rates," said Montano.
Also, the size the mortgage market has grown by about 40%, thus the overall supply will be much larger than it was during the 1998 refiwave.
The bank also said that the impressive numbers for April may adversely impact rolls for May/June.
Credit Suisse First Boston is anticipating April figures of $15 to $16 billion in FNMA 30-year 6.5s and about $10 billion Gold 6.5s, which amount to a total conventional 6.5 production of $25 billion to $26 billion. The bank expects that May delivery should double the April delivery availability.
However, CSFB also issued a caveat to the supply numbers, saying that a large fraction of these supply numbers has already been sold, already impacting the market.
Many of these loans, apparently, are being sold directly by originators. Compared to 1998, there is currently much less homogeneity in mortgage pools, with Alt-A and high weighted average coupon (WAC) loans comprising a larger percentage. These portions of the pools are sold off as TBA securities before the mortgages are securitized, thus mitigating the impact and impressiveness of the supply numbers.
In related news, Freddie Mac's second quarter economic forecast predicts originations to be in the $1.4 trillion to $1.5 trillion range, which is significantly above last year's $1 trillion level and a little higher than 1998's record of $1.4 trillion.
The agency noted that the figures could be higher if the refi wave is stronger than the agency expects.