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Buyout Risk Fails to Materialize

A wave of GSE buyouts of delinquent loans widely expected to affect higher-coupon agency mortgage-backed securities this year failed to materialize in 2010's first month of prepayment data, according to Wall Street research reports.

Prepayments also slowed despite record low rates during the period, but analysts had widely expected that would occur due to tight underwriting and the fact that many loans had already refinanced. More surprising to some analysts was the lack of buyouts. Credit Suisse researchers said the buyouts may have failed to materialize due to operational challenges involved in implementing the accounting changes expected to spur them.

"We believe the economic incentive for the GSEs to buy out delinquent loans is still there and hence buyout risk remains in place in the short term," the analysts said. "However, we would start fading out buyout risk should it not materialize in February."

Barclays Capital researchers said some MBS investors have been concerned about massive GSE buyouts, but they have been reassuring them that it may not happen due to portfolio caps and other factors. Overall, 30-year fixed rate prepayments declined by 16%, according to Credit Suisse. Both firms said prepayments were slower than they had expected.

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