The Big Idea
Lessons learned from agency MBS in 2025
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 agency MBS market seems to enjoy delivering a steady stream of surprises, and 2025 was no exception. The Trump administration made privatization of Fannie Mae and Freddie Mac a topic of serious conversations, something considered nearly unthinkable a year ago. At Ginnie Mae, custom pool production set records despite the illiquidity of those pools. And MBS prepayment speeds surprised everyone in the fall, highlighting the never-ending challenge of predicting prepayments. Each of these developments should keep investors on their toes next year.
#1: A new lease on life for Fannie Mae and Freddie Mac
A year ago, it seemed plausible that the incoming Trump administration would resume efforts to shrink Fannie Mae and Freddie Mac to allow the private mortgage-backed securities market to grow. But this administration would like to privatize the two companies, not shrink them. They have grown their investment portfolios, which should lift earnings, and this helped lift MBS returns. The administration also seems more likely to use the GSEs as active tools to influence housing policy to make homeownership more affordable. The two goals can come into conflict—improving affordability by lowering loan pricing could lower revenues and make privatization more difficult.
#2: Ginnie Mae custom pools go mainstream
Creation of Ginnie Mae custom pools was constrained for many years since these pools are not eligible to be delivered into TBA contracts. However, growth picked up in 2024 and accelerated this year (Exhibit 1). On a couple of occasions, custom pools accounted for over 40% of all Ginnie Mae monthly pool issuance. While the numbers have dipped over the last two months, this is mostly due to the refinance wave—more VA loans than FHA loans refinance, and most VA loans are not put into custom pools, so supply of multiple issuer pools jumped. In fact, most of the net supply of agency MBS pools during 2025 came from custom pools—net supply at the GSEs was roughly zero, as was net supply of Ginnie Mae multi-issuer pools.
Exhibit 1. Custom pooling reached new heights in 2025
Source: Ginnie Mae, Santander US Capital Markets.
In hindsight, perhaps it should have been clear that the growth of customs in 2024 would continue into 2025, since the structure of the TBA market and markets like it encourages a race-to-the-bottom for TBA-eligible collateral. Originators put higher convexity loans into custom pools, the convexity of the TBA drops, so custom pool pay-ups increase and make it worthwhile to create even more custom pools. And the cycle repeats.
Investors need to contend with the growing negative convexity of Ginnie Mae TBA, since the custom pooling trend is unlikely to reverse. In fact, custom pool issuance could keep growing. This should make it more likely that Ginnie Mae TBA underperforms conventional TBA next year.
#3: Prepayment speeds surprise once again
Fast agency MBS prepayment speeds in October caught many market participants by surprise. S-curves looked much steeper than during the prior large refinance event in October 2024 (Exhibit 2). However, speeds are already fading—the November S-curve has returned most of the way to the October 2024 behavior. And all three S-curves are slower than the experience during 2020 and 2021, likely because of low home price appreciation suppressing cashout refinance demand and an elbow shift from higher LLPAs introduced at the start of 2023.
Exhibit 2. Recent S-curve comparison
Monthly S-curves are scaled to account for day count differences.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
One explanation for the shifting S-curve is that they are not properly accounting for the effect of short timelines to close loans. Short timelines would pull prepayments forward, boosting speeds in months like October that are the start of refinance wave. And the December S-curve may prove to be the complement to October’s, slower than any shown the plot. With about a third of the month reported in the intra-month prepayment releases premium coupon speeds are on track to slow further despite still-low lagged mortgage rates and a large day count increase. This pattern has been challenging for market participants and prepayment models to predict, and the temptation will be to overreact to October’s fast print and discount the subsequent slowdown.
#4: No lift-off at Nationstar, yet
Rocket’s acquisition of Mr. Cooper, whose loans are identified as Nationstar in agency MBS pools, closed at the start of October. It was expected to lift Nationstar’s prepayment speeds, since Rocket’s loans typically prepay very fast. Surprisingly, there has been little change in Nationstar’s prepayment behavior since the acquisition closed. It is too early to claim that Nationstar’s speeds are not going to change, but it does remind participants that even a seemingly straightforward conclusion like this one is not guaranteed to come true.
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