Extended uncertainty: Agency MBS spreads may widen by year-end while consumer credit delinquency pressure remains elevated

Overview

This report covers the Agency MBS, RMBS second-lien loan, and consumer ABS structured products markets. The core view is that Agency MBS spreads may trade sideways in the near term because of GSE support and potential bank demand constraints, but from a year-end perspective, if the GSE purchase program does not expand or if there is no sustained buying in 2027, the MBS basis is more likely to widen from current levels. The report also notes that prepayment speeds on Rocket Mortgage-serviced second-lien loans are rising, while delinquency pressure in auto and credit card lending remains elevated.

Core views

First, Agency MBS faces near-term pressure from seasonal issuance growth and slower bank demand, but wider spreads could bring banks back into the market; over the medium term, whether the GSE purchase program expands and whether marginal buyers remain willing in 2027 are the key drivers of spread direction. Second, the rise in prepayments on Rocket-serviced second-lien loans is not explained by collateral characteristics or a meaningful rate move, but more likely by borrowers extending terms to reduce monthly payments. Third, the rise in auto and credit card delinquency rates is mainly due to borrowers staying delinquent for longer, rather than a sharp increase in new delinquencies; high delinquency levels may persist through at least year-end.

Analysis framework

The report assesses Agency MBS supply and demand using MBS OAS, GN CMO floater discount margins, the GSE purchase program, and PSPA constraints; analyzes Rocket second-lien prepayments through CES loan CPR, WALA ramps, loan term structure, GWAC, FICO, LTV, and loan-level matching; and evaluates consumer credit quality using FRBNY Household Debt and Credit data, the Senior Loan Officer Opinion Survey, and Auto ABS delinquency data.

Methodology notes

• Structured products relative valueMBS basis / Treasury OAS

  Use the option-adjusted spread of current-coupon Agency MBS relative to Treasuries to gauge MBS basis valuation.

  The report expects the current-coupon Treasury OAS to move close to its long-term average of about 25 bp by year-end, implying risk of widening from today’s tight levels.

• Mortgage cash flow analysisCPR and WALA ramp

  Use CPR to measure prepayment speed, and use WALA buckets to observe the prepayment ramp as loan seasoning changes.

  Rocket-serviced loans’ CPR is higher than the CES overall pool, and the 2025 vintage shows a steeper WALA ramp, supporting the view that prepayment behavior has shifted structurally.

• Consumer credit qualitySerious delinquency and newly delinquent balances

  Distinguish the level of serious delinquency from the share of newly delinquent balances to identify whether delinquency increases are driven by more new defaults or by longer persistence of existing delinquent balances.

  The share of newly delinquent balances in auto and credit card loans has flattened over the past few quarters, indicating that the rise in delinquency rates is largely driven by borrowers remaining delinquent for longer.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Agency MBS

  Core coverage asset

  Strengths

  In the short term, it may be supported by the GSE backstop and a rebound in bank demand as spreads widen.

  Weaknesses

  If there is no sustained GSE buying in 2027, money managers may be unwilling to buy at current tight spreads.

  Comparison

  Compared with current levels, the report believes year-end OAS is more likely to move back toward the long-term average.

  Risks

  GSE demand falling short of expectations, PSPA constraints not expanding, the purchase program being completed early, or being preserved as future ammunition.

• GN CMO floaters

  Agency MBS internal watch segment

  Strengths

  The discount margin on 6.5% cap GN CMO floaters is close to the March widening peak, which may attract some bank demand.

  Weaknesses

  Recent bank demand has slowed versus March, and CMO issuance has declined.

  Comparison

  Lower-cap floaters have wider discount margins, with 5.5% and 6.0% cap floaters showing more pronounced volatility.

  Risks

  Rising implied volatility and a rebound in rates could continue to widen spreads.

• Rocket-serviced second-lien RMBS

  RMBS prepayment theme

  Strengths

  Borrowers can lower monthly payments by extending terms, which helps explain the increase in prepayments.

  Weaknesses

  Higher prepayments affect cash flow, duration, and yield expectations.

  Comparison

  Rocket-serviced loans’ CPR is higher than the CES overall pool, and the 2025 vintage shows a steeper ramp.

  Risks

  The sample match is small and based on estimates; if refinancing behavior persists, the model assumptions may need to be adjusted.

• Auto ABS

  Consumer ABS credit risk indicator

  Strengths

  Origination is skewing toward higher-credit-score borrowers, and credit standards are tightening.

  Weaknesses

  Auto loan serious delinquency has risen to the highest level in FRBNY data history.

  Comparison

  Serious delinquency in both prime and subprime auto ABS has risen since early 2022, but the divergence in the trend reinforces the "K-shaped economy" narrative.

  Risks

  Higher oil prices, reaccelerating inflation, consumer confidence at new lows, and pressure on low-income consumers could prolong the delinquency upcycle.

Key data

• Agency MBS year-end OAS viewabout 25 bpThe report expects the current-coupon Treasury OAS to move toward its long-term average by year-end.
• CES overall prepaymentabout 22 CPR year-to-date in 2026Higher than 20 CPR in 2025 and 17 CPR in 2024.
• Rocket-serviced second-lien loan prepaymentabout 28 CPR year-to-date in 2026Higher than 22 CPR in 2025 and 17 CPR in 2024.
• Rocket 2025 second-lien 30-year shareabout 22%The report believes the rise in the share of 30-year terms is consistent with the faster prepayment speed.
• Estimated share of 20-year second-lien loans refinanced into 30-year loansslightly above 20%Based on broad loan-level matching by geography, credit score, balance, and original loan payoff date.
• Auto loan serious delinquency rate5.6%At a historical high under the FRBNY data definition.
• Credit card serious delinquency rate13.1%Near the peak seen during the Global Financial Crisis.
• Student loan serious delinquency rate10.3%Close to pre-pandemic levels.
• Mortgage and HELOC serious delinquency rates1.1% and 1.0%Although rising, the absolute levels remain low.

Impact & implications

For investors, Agency MBS may not widen sharply in the near term, but year-end and 2027 supply-demand uncertainty tilt the valuation risk toward wider spreads; RMBS second-lien investors need to watch term-extension refinancing and prepayment model risk in Rocket-serviced loans; and consumer ABS, especially auto ABS, should continue to be monitored for delinquency persistence, tighter underwriting standards, and pressure on low-income consumers.

Risks

• If the size of the GSE purchase program does not expand, or if PSPA constraints are not adjusted, positive 2027 Agency MBS flows may not be sustainable.
• If GSE demand underperforms, MBS spreads could widen before year-end.
• The view that Rocket second-lien loans refinance into 30-year terms depends on broad loan-level matching and a small sample, so there is estimation uncertainty.
• Auto and credit card delinquency rates are elevated; if inflation, gasoline prices, or slower growth persist, low-income consumers may face greater pressure.
• Tighter credit standards may limit new credit supply and affect consumer ABS collateral performance.

What to watch

• Actual GSE purchase volume, whether PSPA constraints expand, and the 2027 marginal buyer mix for Agency MBS.
• Whether current-coupon Treasury OAS moves toward its approximately 25 bp long-term average.
• Bank H.8 data, CMO issuance, and the discount margin on GN 6.5% cap CMO floaters.
• Rocket-serviced second-lien loan CPR, WALA ramp, and the share of new 30-year originations.
• Serious delinquency rates for auto, credit card, student loan, and other consumer loans in the FRBNY consumer debt data.
• Credit standard changes in the Senior Loan Officer Opinion Survey and the share of auto loans originated to higher-credit-score borrowers.