Agency MBS Update for November

Monthly Commentary

December 06, 2019

Halloween was long over in November as geopolitical risk and uncertainty across the globe failed to spook risk assets. Further optimism around the resolution of the trade war between the U.S. and China buoyed risk assets higher with U.S. equities reaching multiple all-time highs throughout the month. The 10yr UST sold off 8bps while interest rate volatility was rather stable. Agency MBS benefited from both the interest rate selloff as well as the risk-on sentiment to stage a comeback from earlier underperformance. Despite continued supply and prepayment concerns, the Bloomberg Barclays MBS Index returned 19bps of excess performance in November, bringing year to date excess returns to 25bps. Total return remained strong at 6.04% year to date.

Performance in 30yr conventionals was positive throughout the coupon stack with a slower than expected speed report. October speeds came in 8% to 10% faster than the previous month from a combination of a higher day count and lower driving rates from the tail end of the summer. FN 3.5s were the best performers at 34bps of excess returns while FN 2.5s were the worst performers at 12bps of excess returns. In GNMAs, speeds were mostly in line with expectations climbing 7% overall in October and still peaking at fast speeds in the higher coupons. The surprise came from G2 3.5s which peaked at 74 CPR versus the previous month’s peak reading of 48 CPR. G2 3.5s were thus the worst performers on the stack at 6bps of negative excess returns while G2 3.0s continued to benefit from bank and overseas buying, ending the month at 22bps of excess performance. November speeds came in slower due to lower day count and lower driving rates, but relatively fast speeds lingered with about 50% of the MBS market still refinanceable. In addition to fast speeds, yearend funding pressure is another major headwind for Agency MBS. Although the Fed is announcing more term repo operations, which should alleviate much of the year end funding pressures, there are still concerns in the market, as we already see Dec/ Jan TBA rolls dropping lower. With weaker dollar rolls and continued prepayment concerns, specified pool payups had another solid month. We continue to see strong demand and payups being well supported even amid higher rates and heavy selling in the form of profit taking.

In the News:

  • The FHFA issued a proposal on pooling practices along with a Request for Input in an effort to promote TBA fungibility and improve liquidity in the TBA market. The proposal suggested creating larger, generic, multi-lender pools, potentially comprising 70% to 80% of each month’s TBA-eligible MBS Issuance. It would look much like that of the G2-multi program. It also proposed directing some out-of-line and fast servicers out of the multi-lender pools into non-TBA eligible single issuer pools, which is similar to what Ginnie Mae did to punish churners. Although it is still early before the FHFA makes a decision, the proposal may not have the impact the FHFA is trying to achieve. For one, regulating servicer speeds will be a difficult task, as was evident in Ginnie Mae’s past efforts to deal with churners. Simply kicking out servicers without a detailed plan will not help with TBA fungibility or liquidity, although it may reduce TBA prepayment speeds all else equal. Also, creating a G2-like conventional multi program with larger multi-lender pools may not improve liquidity at all because the Ginnie Mae II TBA is in fact less liquid than UMBS TBAWe will be looking forward to see if these proposals will be amended after the FHFA reviews public input.
  • The Department of Veterans Affairs (VA) issued warning letters to originators regarding their compliance with Interest Rate Reduction Refinancing Loan (IRRRL a.k.a. Streamline Refi) guidelines. The VA states that some loans that went through IRRRL are violating the statutory requirements of the Economic Growth, Regulatory Relief and Consumer Protection Act. It is noteworthy that this time it is the VA, and not GNMA, going after the lenders. However, given the broad distribution of this letter, the action is probably a highly technical matter and as such we do not expect it to have material impact on speeds.
  • FHFA announced that the maximum conforming loan limits for mortgages in 2020 will rise about 5% from 2019 levels. In most of the U.S., the conforming loan limit for one-unit properties will go up from $484,350 to $510,400. In higher cost areas, in which 115% of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit will be higher than the baseline limit and will rise to about $765,600. The change is a result of generally rising home values but is a slight negative for TBAs as more of the jumbo non-conforming loans will enter the float creating worse convexity.


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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW