While outstanding 30-year MBS supply has been declining in the past two years, until this year, the supply from other fixed-rate MBS sectors has filled in the gap, said a recent report by Bear Stearns. For instance, the outstanding 30-year MBS universe declined by 2% last year. But this was made up for by a 33% rise in other fixed-rate mortgage-backeds. The resulting 8% increase in fixed rate MBS approximated the 9% long-term trend growth in the past 14 years.

Moreover, along with 30-year supply contraction, 15-year supply has declined as well. Bear Stearns said that the total supply in fixed rate MBS has dropped by 0.4% through August. "If net supply stays negative through the end of this year, it would mark the first time in our 14-year data series that fixed MBS has fallen," analysts wrote.

Ironically, the declining fixed-rate MBS sector is occurring while the total in mortgages outstanding has been growing fast, analysts pointed to the fact that some of the drop in fixed MBS is due to growth in the ARM sector. Analysts said the data shows that the change in ARM outstanding balance has been over $15 billion per month since July 2003, outpacing the fixed-rate market since then.

"Both the data on historical agency ARM market share and our analysis of the ARM market share of the conforming universe show that the ARM sector is growing progressively larger," Bear Stearns analysts report. "Furthermore, the ARM sector is now gaining market share at a faster rate."

Aside from the ARM effect, fixed-rate MBS might be declining because originators are securitizing less fixed-rate loans, instead holding mortgages in raw loan form, Bear analysts added.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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