Agency MBS Weekly: MBS Hot Takes: the rap on FHA RAP, G2 ARMs, and a VS4.0 update

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Agency MBS Weekly

MBS Hot Takes: the rap on FHA RAP, G2

ARMs, and a VS4.0 update

Commentary: a hawkish reaction to a dovish FOMC

Rates struggled while spread product held in this data-heavy week, with concern over

Fed credibility and pushing rates much higher. The 10 year sold off roughly 5bps WoW,

and is currently trending above 4.70% as we go to print. MBS held in surprisingly well

with current coupon spreads narrowing 2bps WoW and outperformance vs USTs evident

across the coupon stack. Still, we remain underweight concerned about the most recent

range breakout and rich-leaning valuations.

GSE Portfolio June & Q226 Update

The GSEs released both June monthly summaries and Q2 earnings reports this week.

There was no meaningful adding in June (FN MBS -$0.6bn, FH MBS unch), although Q2

reports show continued runoff of multifam loans in favor of single fam MBS purchases.

FHA’s RAP proposal: operation benefits for borrowers and

lenders, but potential complexities for MBS investors

Last Monday FHA released a draft Mortgagee Letter proposing restructuring FHA Partial

Claim as a Reinstatement Advance Payment (RAP),which would be treated as a servicing

advance secured by the FHA-insured first mortgage. We acknowledge that the proposed

change could improve operational efficiency, enhance borrower awareness of

outstanding obligations, and potentially strengthen preservation of the MIP fund.

However, additional clarity is needed before the framework can be fully implemented.

A rising new affordability product: the G2 buydown ARM

ARM issuance has picked up recently, which is seemingly counterintuitive given the

ongoing curve flattening. More surprising is that the bulk of the increased issuance has

been in GN. A deeper dive into issuance shows that the newer GN ARMs have builder

buydowns and an increasing share are cash out refinancings, moreover Rocket has

ramped up its involvement in the space – all of which help explain the rise in issuance

volumes. Overall the lower rate (offered by an ARM given its shorter duration + the

presence of builder buydowns) + the higher leverage (due to low downpayment of a

…