A recent set of research focusing on 2010 strategies for investors of agency mortgage-backed securities (MBS) by analysts at Barclays Capital finds that credit availability for mortgage originations may increase in the next six to 12 months. However, the situation will remain tight in the next three to six months, they add, as the market grapples with ongoing risk aversion sentiments, loan repurchases stabilization and new regulatory procedures that will need this time to take hold. “In particular, in H210, there could be a meaningful extension of conventional credit to currently under-served segments,” write the analysts in their Agency MBS Outlook 2010, such as “the substantial population of borrowers with low LTV but only mid-range FICOs (700-740).” In the face of this, tougher underwriting standards at the GSEs over the past year also reduced credit availability. Traditionally, these loans would hold around a 30% market share, the analysts say, but tapered off from this level in 2009. The behavior of the GSEs is growing increasingly hard to predict. Meaning the analysts aren’t certain if the GSEs will look to grow their origination percentage, or continue with such risk aversion. “They have to balance political pressure to make mortgage credit available, while at the same time reducing their credit risk on their ongoing book of business,” they write, adding that they are leaning more to the GSEs not loosening credit standards on their own device and instead needing a “clear mandate from the administration to do so.” “However, with the utter failure of [the government refinance program] HARP  and the disappointing results thus far of [the government modification program] HAMP, we would not discount this outcome.” Instead, they reason that repurchase risk, the speed at which issuers must buy back delinquent loans and also drives a level of credit tightening, will decrease due to the expectation that repurchase rates on originations will lessen. This will likely be due to a more robust economic environment on a macro level and dropping levels of delinquencies as worse-off borrowers are shaken out of the system. Write to Jacob Gaffney. Disclosure: the author holds no relevant investments.

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