Agency MBS Issuance Navigates Refinance Headwinds in Q2

The landscape of Agency MBS issuance experienced a notable shift in June, reflecting a deceleration in refinance volumes across the industry. While individual monthly figures saw a dip, the broader second quarter demonstrated underlying strength, primarily fueled by a robust increase in purchase mortgage activity. This bifurcation underscores evolving dynamics within the mortgage market—where does the balance of power truly lie?

The Nuances of Agency MBS Issuance Trends

June saw a perceptible slowdown in agency mortgage-backed securities issuance, registering a 3% industry-wide decline to $118.5 billion. For a select group of prominent lenders, including loanDepot, Onity, PennyMac Financial Services, Rithm, Rocket, and UWM Holdings, this reduction was even more pronounced, tallying a 5% decrease. Does this monthly dip signal a broader weakening, or is it merely a blip?

Despite the June contraction, the second quarter painted a more encouraging picture for overall Agency MBS issuance. Total volume reached an impressive $374.0 billion, marking an 11% increase over the previous period. Analysts attribute this significant quarterly uptick primarily to a substantial 20% surge in purchase mortgage volume, suggesting a resilient underlying housing demand. Covered companies within the analyst’s purview also mirrored this growth, with their issuance volumes rising by 8% for the quarter, exceeding expectations of a 5% increase in origination volume and aligning with consensus.

Yet, the pipeline for future activity appears somewhat less robust. Expectations for rate lock volume, a critical indicator for future revenue, predict a 1% decline for covered firms during the quarter, with a broader market expectation of a 6% reduction for June’s Optimal Blue rate lock index. Prior reports from Optimal Blue for April and May already indicated a 9% month-to-month decline in rate lock activity, highlighting consistent pressure on future origination flows.

Demographic shifts also play a compelling role. While ICE Mortgage Technology’s second-quarter rate lock data revealed millennials dominating both purchase (45%) and rate-and-term refinance activity (44%), they notably trailed Gen Xers and baby boomers in cash-out refinance share, posting 25% compared to 38% and 31% respectively. How will this generational disparity influence future product demand and market strategies?

Furthermore, channel performance varied significantly in June,

• Correspondent volume experienced a 1% increase.
• Retail volume saw a 5% decline.
• Wholesale volume dropped by 6%.

This divergent performance underscores the dynamic competition among various lending channels, with correspondent originators seemingly better positioned to capture available market share amidst the shifting landscape.

Non-Agency MBS: A Segment of Resilience?

While agency volumes contend with refinance volatility, the non-agency MBS market presented a fascinating counter-narrative, showing signs of moderation in the second quarter yet remaining notably elevated compared to 2025. Is this segment proving more resilient to interest rate fluctuations?

Industry projections previously suggested a potentially record-breaking year for non-agency issuance. For 2026, the total non-agency MBS issuance is forecast at $236 billion, which includes a substantial $100 billion in non-qualified mortgages (non-QM). This represents a notable increase from the $206 billion total, with $80 billion non-QM, recorded just one year prior. The demand for alternative lending solutions appears to be growing, reflecting a market that is adapting to evolving borrower needs and regulatory environments.

Specifically, the second quarter saw non-QM issuance reach $27 billion. This figure, while down 16% from the first quarter, still marked a robust 58% increase compared to the same period in 2025. Another significant subset, home equity products—encompassing HELOC, closed-end, and home equity investment—tallied $7.8 billion in issuance. Although this represented a 10% quarter-to-quarter dip, it was more than double the volume (a 115% increase) compared to the same period in the previous year. These figures suggest a strong and persistent appetite for non-traditional mortgage and home equity financing, even as interest rates remain elevated.

“The sustained activity in non-agency markets, particularly the tightening spreads, signals a clear institutional demand for yield and diversification beyond conventional agency products.”

Adding to this perspective, non-agency spreads tightened significantly during the second quarter, indicating increased investor confidence and demand for these securitized products. For instance, a recent issuance from Annaly, frequently used as a market proxy due to its consistent activity, saw its “AAA”-rated tranche tighten by 10 basis points, with the “BBB” tranche tightening by an even more impressive 20 basis points. Similar trends were observed in other deals, such as an AD Mortgage issuance which closed at a 135 basis point spread, tighter than the previously anticipated 140 basis points, driven by strong institutional interest. A Rocket closed-end second securitization also saw its AAA tranche tighten by 20 basis points and its BBB tranche by 10 basis points. Such tightening spreads are a powerful indicator of robust investor appetite and reduced perceived risk within this segment, suggesting that non-agency products are increasingly seen as attractive investment vehicles.

Prepayment Speeds and Market Dynamics

Prepayment speeds—a critical metric for mortgage-backed securities investors—offered a mixed signal in June, reflecting the underlying complexities of borrower behavior in a dynamic interest rate environment. These speeds directly impact the duration and yield of MBS portfolios. What insights can we glean from these movements?

For conventional MBS, prepayment speeds saw a slight increase of 10 basis points, reaching 8.5% in June. This modest rise could imply some pockets of refinancing activity or perhaps a greater propensity among conventional borrowers to move or adjust their housing situations despite prevailing interest rates. Does this suggest a certain segment of the market has become less rate-sensitive, or are other factors, such as relocation or home equity utilization, driving these prepayments?

Conversely, government securitizations experienced a more substantial decline, with prepayment speeds falling by 120 basis points to 10.6%. This sharper deceleration for government-backed loans, often associated with FHA and VA programs, is more aligned with expectations in a higher interest rate environment where refinancing incentive is significantly diminished. The stark difference between conventional and government prepayment trends highlights varied responsiveness among different borrower demographics and loan types to the current rate landscape. This divergence in prepayment behavior forces MBS investors to carefully re-evaluate their portfolio compositions and interest rate risk exposures.

Ultimately, these prepayment figures underscore the direct consequence of fewer refinance opportunities. When borrowers cannot easily lower their mortgage rates, they are less likely to prepay their existing loans, either through a new refinance or by selling their home to take out a new, lower-rate mortgage. For those managing MBS portfolios, understanding these nuanced prepayment speeds is paramount for accurate cash flow projections and risk management. The market is clearly signaling a sustained environment where loans remain on the books longer, impacting duration and overall returns for investors in the mortgage bond market.

How Does This Agency MBS Issuance Shift Affect You?

The evolving trends in Agency MBS issuance and the broader mortgage market have concrete implications for various stakeholders. For lenders and originators, the message is clear: the era of high-volume refinance activity is largely behind us. Successful strategies must pivot aggressively towards capturing purchase market share. This demands enhanced customer acquisition tools, efficient processing for first-time homebuyers, and a robust understanding of local housing market dynamics.

Investors in mortgage-backed securities face a critical recalibration of their portfolios. The shift from refinance-driven to purchase-driven MBS alters duration risk and prepayment sensitivities. Analyzing the specific characteristics of underlying loans in new MBS pools becomes more important than ever. Furthermore, the resilience and tightening spreads within the non-agency market suggest an expanding universe for yield-seeking investors, provided they conduct thorough due diligence on the underlying credit risk. Careful consideration of prepayment risk for both conventional and government pools is essential for maintaining target returns.

For homebuyers, particularly millennials, the consistent strength in purchase volumes is a positive signal for housing market demand. While higher interest rates remain a hurdle, the market continues to facilitate homeownership for a significant segment. However, existing homeowners contemplating a refinance should acknowledge the current scarcity of advantageous opportunities. The data definitively shows that for most, the window for rate-and-term refinancing has largely closed, making cash-out options for equity extraction a more targeted, and often more expensive, decision. What will be the next catalyst for a market shift?

Ultimately, the current mortgage market reflects a mature phase of adjustment to higher interest rates. While some segments, particularly refinancing, experience significant headwinds, the persistent demand for housing, as evidenced by purchase volumes, provides a foundational strength. Investors and consumers alike must adapt to this new normal, focusing on fundamental market drivers rather than anticipating a return to the refinance booms of the past.

Mortgage-Backed Securities Market Insights – Disclaimer

The information provided regarding Agency MBS issuance and market trends is for informational purposes only and does not constitute financial, investment, or legal advice. Market conditions, interest rates, and individual circumstances can vary significantly. Readers should not make financial decisions based solely on this content. Always consult with a qualified financial advisor, mortgage professional, or other relevant expert before making any investment or financial decisions related to mortgage-backed securities or real estate.