HMBS Supply Rising Slowly – Will it Soon Decline?

HMBS Pool prepayment rates continued to rise in March 2014.  This mostly reflects the increasing number of seasoned loans that are being assigned back to HUD at the 98% Loan Balance-to-Maximum Claim Amount ratio.  The March 2014 report can be found here.

As of March 31, 2014, 3,074 HMBS pools with a balance of $47.5 billion are outstanding.  Although this represents a growth in supply of about $300 million over February 2014 month-end, it is well below the average monthly increase of $750 million since the program’s inception.

Total issuance did cross the $50 billion threshold in March 2014.

HMBS supply rose from $37.5 billion to $46.3 billion during 2013, consistent with the historic trend.  For 2014 however, total supply has risen by approximately $500 million, $400 million, and $300 million in January, February, and March, respectively.  This is not surprising; new supply is significantly lower and prepayment speeds are creeping higher as the older vintages reach the 98% trigger.  This trend is likely to continue, and the total outstanding supply of HMBS will probably begin to decline sometime this summer.  In other words, prepayments will outweigh the sum of new supply (including tails) and negative amortization.

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