2022 Key MBS Themes and the Case for Specified Pools Andrea F. Pringle, The Baker Group THE MORTGAGE MARKET IS ALREADY off to a volatile start in 2022, with Treasury yields soaring, spreads widening, and mortgage rates breaching 4%. The Federal Reserve has made clear it will focus on a robust monetary tightening campaign to combat high inflation by ending mortgage-backed securities (MBS) purchases and likely shifting the reinvestment of mortgage paydowns from MBS to Treasuries. This comes on the heels of record home price appreciation (HPA) and expectations for prices to continue rising at a modest pace, increasing loan sizes. These factors create headwinds for MBS performance in 2022, especially for pools comprised of generic or “to-be-announced” (TBA) collateral. Pools containing “specified collateral” (described below), on the other hand, stand to outperform TBA as the Fed taper and rising loan sizes impact TBAs more directly. Higher Supply A record net supply of agency MBS was set in 2021 and the Fed purchased about two-thirds of it. Although net supply is not forecasted to be as high in 2022, without the biggest buyer in the market, available supply would increase even if net issuance remained level. However, 2022 supply could be boosted by continued HPA. Supply is strongly correlated with HPA and home values are projected to moderately increase in 2022. Additionally, the Fed is expected to finish adding MBS to its portfolio in March and to cease reinvesting mortgage principal paydowns this summer. All of this means the private market (ex-Fed) will have to digest significantly more supply in 2022. It is also important to remember that the supply the Fed has been taking out of the market is TBA collateral. This is the “cheapest-to-deliver” (CTD) or “worst-to-deliver” (WTD) collateral that has been stripped of loans that offer added value to investors. Loans with certain characteristics that exhibit more predictable prepayment behavior are pulled out of TBA and pooled separately into “specified” pools. Because loans with these desirable attributes are carved out of the TBA float, what is left in TBA is the least desirable loans. Without the Fed sopping up that CTD/WTD float, supply pressure stands to impact TBAs more directly than specifieds. Higher Loan Sizes Higher loan sizes will also likely hit TBAs more directly. The Federal Housing Finance Agency raised the conforming loan limit by a record 18% for 2022, up to $647,000. This means some loans previously considered “jumbo-conforming” are now eligible to be securitized into TBA. That could push the average loan balance of what becomes part of the TBA float higher and hurt valuations as pricing adjusts to account for the larger loan balances. Larger loan balances are generally less desirable to investors because prepayment behavior is highly interestrate sensitive. The larger the loan size, MBS Themes — continued on page 24 NEBRASKA BANKERS ASSOCIATION 23
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