Due to the “new lower path for mortgage rates” Goldman is raising their estimate for 2016 MBS Issuance to $1.3 trillion from $1.2 trillion and raising their 2017 MBS issuance estimate to $1.3 trillion from $1.1 trillion. Goldman’s team cut their 10-Yr US TSY estimate to 2% from 2.4% ahead of an expected refinancing blitz.
All of this follows “the decision” out of the UK and Goldman’s credit group fears the “burned-out” borrower (which consists of 65% of the whole borrower pool) and those borrowers who are “sensitive to a change in rates” will seek to refinance their mortgages as the Fed raises rates (though that action is debatable as Jeff Gundlach said in June).
Goldman expects refinancing volumes to increase as rates remain lower for longer in advance of an inevitable Fed rate hike:
A large fraction of outstanding conventional mortgage borrowers are on the cusp of refinancing, so a further decline in rates could elicit significant additional refi volumes. Exhibit 1 shows that over 65% of outstanding mortgage borrowers have note rates between 3.5% and 4.5%; these borrowers are the ones whose refi behavior is most sensitive to changes in rates. Prepayments on borrowers with high note rates (> 5.0%) are not very sensitive to changes in interest rates, as these borrowers are already far in-the-money to refi, and are burned-out. Borrowers with note rates below 3.25% are out-of-the-money to refi, and are also insensitive to small rate moves. The borrowers who are now slightly in-the-money are most sensitive to rate changes, and there are many such borrowers. Mortgage universe negative convexity is at -2.0, an 80th percentile level relative to 2000-2016 history, meaning that MBS portfolio durations can move significantly as rates change going forward.
The fear on Goldman’s desk stems from the spike in internet-based searches for mortgage refinancing, which hit a level unseen since Q3 2012::
One can only image what it must be like to be a borrower in San Francisco, where the PoppyLoan offered by the San Fran Credit Union appears to have done nothing to dampen the historic ramp in the Cash Shiller Index:
Deutsche Bank noted in April the slow start to home purchases…perhaps the declining 30-year rate will not only spur refinancing but also home purchases, lest we learn the economy real is not as strong as the Kool-Aid salesman want us to believe:
The only thing any of us can do is hope the “un-hedged” (and clearly un-hinged) Fed portfolio can be managed (pause for laughter).
via http://ift.tt/29lQi5B Tyler Durden