Has the mortgage-backed securities market, one of the only thriving sectors in the fixed-income marketplace this year, simply caught a cold, or is the ailment far more serious?

The question is a hotly debated one among mortgage players, as some said they still believe 2003 could be another powerhouse year for MBS issuance. At the same time, however, MBS underwriting volumes have dropped precipitously in each of the past four months. About $22.2 billion in MBS was underwritten in November, compared with $87.3 billion in the same month in 2001, according to a monthly data analysis by Thomson. That dip follows equally depressed performances for the previous two months. In October, MBS underwriting was $32.3 billion, down 38% from the same period last year, and in August, it was $28.0 billion, down 72% from the $48.3 billion in September 2001.

These figures pertain to the private label MBS market, as Thomson separates federal agency MBS issuance from its MBS underwriting totals. However, long-term federal agency issuance also was down substantially in November, with $28.9 billion underwritten compared with $50.8 billion in November 2001.

What does the downturn mean? Bankers said they aren't sure, yet. Some consider it a temporary dip, and note that that the overall MBS market continues to post impressive volume increases. Certainly, a longer-term view of the MBS market shows a much more positive picture.

According to the Bond Market Association (BMA), the mortgage-related securities market (which combines agency and private-label deals) could break its all-time volume record of $1.67 trillion this year. Thomson found that roughly $1.2 trillion in combined agency and private MBS had been issued as of the end of November, compared with $1.1 trillion last year. Some bankers, however, argued that MBS issuance is larger than the latter figure, noting that some methods of measuring the MBS market are more stringent than others.

"We continue to expect a lot of mortgage issuance next year," said Alec Crawford, a mortgage analyst for Deutsche Bank Securities. He noted that a great number of recently originated mortgages have yet to be securitized, and likely won't find their way into MBS pools until later in 2003.

Tis the season

In a year when nearly every other debt market sector faced corporate downgrades, issuer scandals, pricing volatility and overall malaise, mortgage deals have been a constant source of regular volume.

This was due in part to continuing low interest rates, which have induced hundreds of thousands of homeowners to refinance their mortgages, and thus pump wave after wave of new supply into the mortgage securitization market.

One source speculated that the recent downturn in underwriting could simply be due to market saturation. "Who hasn't refinanced their mortgage yet? There's ultimately a finite amount of homeowners out there," he said.

The time of year is also a factor-refinancing a mortgage is a low priority during the holiday season. For the Thanksgiving week ending Nov. 29, the Refi Index was down 48%.

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