The month of March started with President Barack Obama's Homeowner Affordability and Stability Plan underway.
The expectation is that it will help between seven and nine million families restructure or refinance their loans to avoid foreclosure. Of that total, four to five million people would be helped through refinancing via the GSEs of their existing FNMA or FHLMC Gold mortgages to lower rates, resulting in lower monthly payments, and the other three to four million at-risk (i.e., subprime) homeowners would have their loans modified in some way that allows for affordable monthly payments with various incentives to the servicer to pursue a modification and to the borrower to keep their loan current.
To further solve the housing, financial and economic crises, in mid-March the Federal Open Market Committee (FOMC) announced that it would buy an additional $750 billion in MBS, bringing its total to $1.25 trillion for the year, and they would also purchase $300 billion in longer-term Treasuries over the next six months to help pressure mortgage rates lower. As a result, Deutsche Bank Securities believes that the 10-year Treasury yield will reach 2.25% with 2s10s flattening to 150 basis points.
Barclays Capital analysts expect that the Federal Reserve's Treasury purchases will be concentrated in the seven- to 10-year area, as this has the greatest influence on mortgage rates. They currently estimate overall Treasury bond issuance at around $1 trillion over the next six months with supply in the seven- to 10-year area at approximately $300 billion.
With the prospect that the Fed will take down most of the issuance in this term area, mortgage rates are likely to get lower. Analysts expect primary mortgage rates to fall into the 4.75% to 5.00% range in the coming weeks.
Supply Ramping Higher
Gross agency supply MBS has already ramped up sharply in March. In the first three weeks of March, issuance totaled $143.3 billion compared with $100.3 billion in February. Based on paydown expectations of the mid-$90 billion area, net issuance is estimated to be a positive $50 billion or more compared with negative net issuance of $16.9 billion in January and negative $5.3 billion in February. By agency, issuance to date in March on Fannie Mae MBS was $75.5 billion, Freddie Mac $35.5 billion and Ginnie Mae $32.2 billion.
For the remainder of 2009, Bank of America/Merrill Lynch analysts project that gross issuance of agency MBS could average $250 to $300 billion per month. This compares with $230 billion during the peak period in 2003, they said, but noted that the MBS market is about 50% larger than in 2003. Monthly net issuance is predicted at $48-$52 billion for the rest of the year, resulting in total net issuance in the range of $460-$490 billion for 2009.
Recently, JPMorgan Securities analysts revised its outlook for gross and net supply for 2009. At the beginning of the year, JPMorgan projected agency MBS gross and net issuance of $2 trillion and $720 billion, respectively, but now project $1.8 trillion gross and $420 billion net assuming a 5% mortgage rate scenario. They revised their outlook lower despite attractive mortgage rate levels this year as borrower response and subsequent realized prepayments have come in lower than they had originally expected. In addition, they said borrowers' ability to refinance from non-agency and ARMs into fixed-rate loans has been limited by the ongoing tight underwriting standards, higher LTVs as home prices continue to decline and higher credit costs.
Analysts acknowledge that the Home Affordable Modification Program and increasing the conforming loan limit back to $729,000 will keep gross supply relatively high, but they expect it will contribute to lower net supply than originally forecast. The effect of the streamlined GSE program is essentially a "recycling" of a large portion of the net supply as no cash-outs are allowed (except for closing costs), and it is limited to those with GSE mortgages.
Fed/Treasury Support Offsets Most of Supply
From the beginning of January through March 18, the Fed has bought $272.1 billion in MBS, equivalent to $4.6 billion per day. Based on the $1.01 trillion left to go, Fed future purchases look to pick up to an equivalent of $5.2 billion per day.
Meanwhile, Treasury has bought $35.3 billion in GSE MBS in January and February, or $905 million per day. Analysts' expectations are for Treasury support to total around $150 billion for the remainder of the year, while the GSEs have an estimated $200 billion before they reach their portfolio cap. All of this combined suggests that MBS purchases from government sources total more than $1.6 trillion for 2009.
Thus, the government support represents 70% of the gross supply outlook and well over the net supply expectations. Buying from other traditional investors such as banks, money managers and overseas, for example, is less certain - especially since their investment choice will be largely 4.0s and 4.5s and as yields are relatively low currently.
Prepayment Outlook
FNMA and GNMA March prepayment speeds are projected to decline around 10% and 7% on average, respectively, from February, with paydowns estimated at around $94 billion. Factors influencing speeds include a decline in refinancing activity in February as borrowers waited for lower mortgage rates as well as for the President's housing plan, and a higher day count. The Mortgage Bankers Association's Refinance Index averaged 3469 in February compared to 5297 in January, while the number of collection days increases to 22 from 19. The March prepayment reports are going to be issued beginning the evening of April 6.
Looking further out, speeds at this time on FNMAs are predicted to increase 17% on aggregate in April, while May is seen surging over 50% as the impact of the housing plan begins to be felt. The largest percentage increases are projected in 6s and higher. GNMA gains are more mild at 14% in April and 10% in May.
Prepayment speeds are expected to ramp up to levels not seen since 2003, but they "are unlikely to reach the heights seen in 2003," Barclays Capital analysts said.
Over the next few months, speeds are expected to pick up sharply, led by recent vintages and higher coupons, they said. In particular, they project speeds on 2006 to 2008 production 5s through 6.5s to reach 50 to 60 CPR by the June report, which is released in July.
JPMorgan analysts also predict that higher coupon conventionals "are likely to see spikes up to 60 CPR on TBA collateral" during the summer if the President's plan is successful.
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