Lehman Brothers and JPMorgan Securities analysts reviewed the outlook for net issuance for the remainder of the year in this week's research.  

Lehman's conclusion is a slowdown in the pace of monthly agency net issuance to around $35 billion to $40 billion from $50 billion.  Furthermore , of this amount, they project over 50% to be in GNMA paper (not counting the pick up from the Hope for Homeowners program).

JPMorgan's projections are similar at $30 to $40 billion range through the rest of the year, down from the $50 billion to $60 billion per month in the first half of the year.

Factors contributing to the lower supply include the higher agency g-fees, ongoing tightening in lending standards, reduced lending capacity, declining home prices, and weakening seasonals heading into the fall, analysts said. 

Lehman's report considered the components of agency net issuance in determining their outlook, which is broadly that new purchase originations, non-agency-to-agency refinancings, and agency-to-agency cash-out refis. 

Specifically, regarding the nonagency universe, analysts pointed out the bulk of it has little rate incentive to refinance - approximately 1% of the oustanding prime universe and 3% of the alt-A universe has at least a 50bps incentive to take out an agency loan, they estimate. 

In the subprime space, however, there is at least 30% of that universe that has an incentive and can qualify. Lehman analysts expect, however, that this group of refinancers will choose an Federal Housing Administration loan versus a conventional. 

Assuming current rates, Lehman predicts annual nonagency-to-agency refinancing volumes of around $105 billion. Even if rates increase 50 basis points, they don't expect much decline in refinancing volumes. 

In new purchase originations, they calculate there are roughly $800 billion of annual purchase originations coming from the current level of sales in single-family existing homes and new home sales. They estimate 50% of these originations are going into the agency market.

So what does this all mean for MBS? JPMorgan analysts believe the lower supply should help alleviate some of the concerns regarding MBS sponsorship.

"We expect that a $25 billion to $30 billion falloff in supply will more than offset any weakness in agency portfolio growth or foreign purchases in the months ahead," analysts said. 

Meanwhile, Lehman believes the pickup in Ginnie issuance could overwhelm the current valuations of GNMA/FNMA swaps.  As a result, they "recommend an underweight to GN/conventional swaps in 5.5s and 6s to benefit from the pickup in GNMA issuance."

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