Mortgage-Backed Securities Insights — Week of September 15, 2025

Hi, I'm Jerry Levy, Managing Director of Texas Capital’s Mortgage Sales & Trading.

The macro data has finally confirmed the slowdown. The BLS adjustment of 911,000 less jobs for March 2025, when added to the anemic growth in the non-farm payroll numbers in the last four months, means that the economy has been slowing for the last 18 months in terms of job growth. We can now expect the other measures that the jobs data feeds to be revised lower. Wage and salary compensation, personal income, private savings, national savings and productivity indices. 

For the MBS market, the reaction has been swift. The basis is now 120 basis points, the low for the year. The Ginnie 5% in October is now trading over par. Hedging is moving down in coupon and away from the 6.5 and 7% coupons. Agency origination volumes jumped in the last week to over 4 billion per day, from just over 3 billion the week before. Yes, this is all refi-related, as expected, and questions certainly remain whether purchase activity will move higher in the fourth quarter of 2025. As a reminder, as we approach a 6% 30-year mortgage rates, and we are within 15 to 20 basis points of that, approximately 14% of all outstanding agency mortgages will have a 50 basis point rate incentive to refinance.

I spent last week meeting with originators from around the country: large, medium and those associated with homebuilders. There has been an outbreak of something that we have not seen in over a year: optimism. Volumes are up and lower rates are here and believed to be going lower. These lower rates, the Fed will cut 25 basis points this week; some analysts are saying the probability of 50 basis points is 50%. But I will repeat my view of the 25 basis points in September, followed by 25 basis points in October and again 25 basis points in December. It will be interesting to read Chairman Powell's statement as he modifies his "curious balance" description of the labor market, which is clearly deteriorated.

I do want to bring attention to the fact that the FOMC does have a dual mandate, stable prices, but also maximum employment while paying attention to the medium- to long-term interest rates like the USD 10-year. Hovering at 3%, inflation has not accelerated, and Secretary Bessent is doing everything he can to limit supply of 10s and 30s to keep those yields lower. One out of every four unemployed now has been looking for work for more than six months. That is the highest percentage post the pandemic. In total, 1.9 million unemployed have been out for longer than 27 weeks. That's double the amount from as recently as 2023.

AI forces are also coming into play here. Anthropic's Claude software reports that 77% of companies using their software are doing it for “full task delegation,” which is also known as job elimination by AI. CMBS is not providing any relief either. Asset class issues are worsening. Distressed CMBS reached 11.8% in August, with special servicing at almost 11%, as almost 39 billion of the asset class is now past the maturity date, reflecting the amend and exchange strategy that has been used to try to keep the asset class going. Internationally, the sell off in French sovereign debt, there are now 10 French companies that yield less than the sovereign, while 80% of European investment grade issuers yield less than French debt. Show how quickly the market will react if there are not policies in place to address fiscal issues. The UK is not far behind this scenario. 

These are the realities facing the chairman. Stephen Miran is also expected to be confirmed in time to be a voting member this week, adding to the dovish flank of the FOMC. Thank you for listening. Until next time.