The Big Idea
Lessons learned from agency MBS in 2024
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The housing market struggled to regain its footing in 2024, as home sales failed to achieve the modest increases expected by industry forecasters at the start of the year. This led to another year of tepid net supply for agency MBS. The rally in September did provide a boost to home sales, but rates did not stay low for long. The volatility of MBS option-adjusted spreads did not persist into 2024 as expected, due low supply and a modest return of bank demand. And muted conventional prepayments speeds early in the year turned out to be a mirage, as fast speeds reappeared during the late-year rally.
Net supply underwhelms
Net supply is poised to come in slightly lower than 2023, contrary to an expected increase at the start of the year. The main reason was a softer than expected housing market (Exhibit 1). Forecasts from the Mortgage Bankers Association and Fannie Mae both anticipated a pickup in existing and new home sales in 2024. Existing home sales are running slightly below 2023, falling 1.8% compared to projected increases of 3.6% and 4.8%. And new home sales are up only 0.6%, compared to forecast increases of 9.2% and 12.4%. The home sales data is through October 2024, so could change once the whole year is reported.
Exhibit 1. A softer than expected housing market prevented net supply from increasing.

Data through October 2024. Labels on bars indicate percent difference from 2023 actual sales.
Source: National Association of Realtors, U.S. Census Bureau, Fannie Mae, Mortgage Bankers Association, Santander US Capital Markets.
However, net supply through November is currently on pace to fall 11.2% to $17.2 billion from $19.4 billion each month, a larger drop than suggested by the modest year-over-year changes in home sales. Part of the difference is due to a modest increase in buyouts, which increased about $700 million each month. Although that number seems small, it accounts for nearly one-third of the decrease in net supply from 2023 to 2024.
The gap between 2023 and 2024 could still narrow after the final issuance and prepayment numbers are recorded for December. Changes in prepayment speeds typically precede changes in gross issuance by roughly a month. That means net issuance tends to run below average when speeds increase at the start of a refinance wave and run above average as speeds slow at the end of a refinance wave. Speeds are expected to slow from November to December, so December could end up being a stronger than average net issuance print.
Bank buying stabilized mortgage option-adjusted spreads
Banks shifted from selling MBS to buying MBS in 2024. Although they bought only modest amounts, it was large compared to net supply (Exhibit 2). In 2023 bank portfolios’ agency MBS positions shrunk $19.1 billion a month, while over the first 11 months of 2024 those portfolios grew $12.1 billion a month. Ultimately investors like money managers absorb that runoff. This means the effective net supply, including Fed portfolio runoff, fell from $55.9 billion a month in 2023 to $21.1 billion a month in 2024, through November,
Exhibit 2. Effective net supply dropped in 2024.

Bank and Fed runoff generates positive net supply for other investors. Bank buying is negative effective supply in 2024. Changes in bank holdings estimated using 12/12/2024 Federal Reserve H.8 report, Table 2.
Source: Federal Reserve, Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
This lower supply reduced the volatility of option-adjusted spreads in 2024 (Exhibit 3). At the start of the year, it was expected that banks were unlikely to grow mortgage positions and MBS spreads would be more sensitive to demand from money managers. This view likely underestimated how spread volatility might drop even if banks held portfolios steady. But even this small change in bank buying acted to stabilize spreads, and volatility is now near the lowest levels reached over the last 25 years.
Exhibit 3. The 6-month volatility of the MBS Index OAS fell in 2024.

Source: Federal Reserve, Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
Negative convexity returned late in the year
Early in the year some questioned whether loans had become less negatively convex, since prepayment speeds for conventional loans did not respond much when rates dropped in late 2023. This article argued that the flat S-curves were a mirage because most loans were not yet seasoned enough to be able to refinance, and the loans that were in-the-money were high SATO loans that are less refinanceable. This argument proved correct, as prepayment speeds jumped when rates dropped in September (Exhibit 3). There is limited data for deeper in-the-money low-SATO loans, so that S-curve gets truncated for the most recent period. But the high-SATO S-curve reached the same levels as it did during the pandemic, so has similar negative convexity.
Exhibit 4. S-curves were just as steep in 2024 as during the pandemic, although with an elbow shift.

Conventional 30-year fixed-rate loans, owner-occupied, 6 to 36 WALA, $400,000 to $500,000 original loan size, original FICO≥700, original LTV≤80. Low SATO is ≤25 bp spread-at-origination. Rate incentive calculated using Optimal Blue’s rate lock indices.
Source: Fannie Mae, Freddie Mac, Optimal Blue, Santander US Capital Markets.
There is a distinct elbow shift present in the recent speeds relative to the pandemic. One likely reason is loans with temporary buydowns, which have a lower current rate incentive than indicated by the reported note rate. However, as the buydown expiration approaches this elbow shift should vanish and the loans should become more refinanceable at lower rate incentives.
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