Forecast Calls for $500B Drop in MBS Issuance

The headwinds of rising interesting rates and the end of the refinancing wave could reduce agency MBS issuance by more than 30% next year.

Gross Fannie Mae, Freddie Mac and Ginnie Mae MBS issuance will total more than $1 trillion in 2014, down over $500 billion from 2013, MBS strategists at Bank of America Merrill Lynch are forecasting.

That forecast is aligned with our forecast for total originations of about $1.2 trillion,” Mortgage Bankers Association chief economist Mike Fratantoni told NMN.

The interest rate on the 10-year Treasury note rose above 3% on Thursday. The yield on the 10-year Treasury could reach 3.75% by yearend 2014 as the Federal Reserve proceeds with tapering and purchases fewer and fewer U.S. Treasury and agency mortgage-backed securities, accord to the MBS strategists.

Assuming a linear taper for the Fed, its net MBS purchases in 2014 could total $240 billion, down from $480 billion in 2013, according to a Dec. 20 BAML Securitization Weekly report.

Homebuilders are optimistic about the outlook for 2014, but they remained concerned about tight credit and recent declines in mortgage purchase applications, the MBS strategists noted. As a result, we continue to think that, due to persistence of a tight mortgage credit regime, mortgage purchase volume is more likely to surprise on the downside in 2014.

December is generally a slow time of year for buying a home. Yet purchase mortgage applications are continuing to run more than 10% below last years pace, Fratantoni said.