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June Originations Rise Modestly, Still Look Weak

Activity in the secondary mortgage market picked up modestly in June, but FBR Capital Markets warns lenders against celebrating just yet.

Looking at the latest data from Inside Mortgage Finance, FBR notes issuance of mortgage-backed securities (MBS) came to $76 billion in June, up from May's total of $68 billion and April's $67 billion.

Based on the total issuance of $211 billion in the second quarter, the investment firm estimates total originations were $264 billion for the quarter, just above the $263 billion estimate.

Still, with May issuance bumping up just barely and June seeing only a modest rise, FBR says the market still risks falling short of $1 trillion in originations for the year. "As such, we remain adamant that more capacity needs to come out of the industry, given a vast majority of originators were targeting a $1.1 trillion to $1.2 trillion market," the company said in a note to clients.

With most lending activity still happening relatively high on the credit spectrum, banks will need to open up their criteria for lower-FICO borrowers, FBR added.

The balance between opening up lending criteria and maintaining smart practices is a challenge many lenders have had trouble facing recently, especially as regulators have moved to establish guidelines under the qualified mortgage (QM) and Ability-to-Repay guidelines. However, FBR maintains its assertion that the government will focus on alleviating currently restrictive conditions over time.

For now, the company says firms with flexible platforms remain in the best position.

"We believe companies that have sizeable mortgage market exposure and scalable origination and servicing platforms remain well positioned as they gain market share or should origination activity increase," FBR said. "With significant negative investor sentiment having driven down earnings expectations for those companies with meaningful exposure to originations, we believe most of the bad news is already in existing stock valuations."

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