With the most recently issued 30-year mortgage bonds trading above par, a rising concern is the quality of borrowers. These are homeowners with the ability to refinance quickly should rates drop enough. “So if you get a rally from here, you are going to have a whole slew of brand new 4 percent and 4.5 percent MBS that are going to refinance very quickly,” said Schmidt.
The government agencies have mostly held the line on expanding credit since the financial crisis hit a decade ago, and now the Federal Reserve is set to exit the mortgage market and no longer absorb the fastest paying pools.
“Investors are seeking alternatives,” Johannes said.
This article was provided by Bloomberg News.