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Fannie Prepay Speeds Fall to a Five-Year Low

The overall prepayment rate for 30-year mortgages securitized by Fannie Mae fell about 10% in December to its lowest level in five years, according to Bear Stearns & Co.

The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 13.8 CPR, down from 15.4 CPR in November, marking the first time it has been below 15 CPR since January 2001, said Bear Stearns analyst Dale Westhoff.

The analyst commented that the 10% Fannie Mae speed decline was small in view of the 28-basis-point rise in mortgage rates during the same period.

"It was somewhat surprising that speeds on premium coupons, particularly [Fannie Maes], did not show a higher sensitivity to the sell-off in rates," Mr. Westhoff said.

The aggregate prepayment rate on Freddie Mac 30-year collateral declined 13%, from 14 CPR in November to 12.1 CPR in December. Despite the greater falloff in speeds, Freddie Mac collateral continued to prepay slower than its counterparts in Fannie Mae mortgage-backed securities "across virtually all coupons and vintages," the analyst said.

Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral fell by 10%, from 21.4 CPR in November to 19.3 CPR in December. Mr. Westhoff said the speed decline for Ginnie Maes was uniformly distributed across the coupon stack.

For agency hybrids, speed declines were "much more muted" than for MBS with fixed-rate collateral, "highlighting the extension protection" offered by the hybrid sector, the analyst said.

"This was particularly true of 3/1 hybrids, where speeds on discount cohorts generally declined by less than 5%," he reported. "Moderately seasoned 5/1 hybrid speeds declined around 10%."

Mr. Westhoff projected that the January prepayment report would bring evidence of a greater slowdown for agency MBS.

"Despite the relatively stable mortgage rates over the last two months, we would expect prepayments to decline by over 15%, with premium coupons showing a larger decline," the analyst said.

In the November reporting period, prepayment rates for 30-year mortgages in agency MBS declined 16%, according to Bear Stearns.

Mr. Westhoff and Bear Stearns analyst V.S. Srinivasan said the falloff was "fairly uniform" across the board, citing speed declines of 19%, 18% and 20% for Fannie Mae 5.0%, 5.5% and 6.0% coupons, respectively.

"For the first time in recent memory, discount speeds declined slightly more than expected," the analysts said. Nevertheless, discount speeds remain at historically high levels, "driven by vigorous cash-out refinancing and housing turnover activity," they said.

Meanwhile, Freddie Mac 30-year MBS speeds continued to be "marginally slower" than Fannie Mae speeds across most coupons and vintages, they reported.

Among MBS backed by 15-year mortgages, prepayments declined 10% in November, with overall speeds falling from 13.6 CPR to 12.1 CPR for Fannie Mae collateral and from 12.8 CPR to 11.7 CPR for Freddie Mac collateral, according to Bear Stearns.

In the Ginnie Mae sector, prepayments fell only about 9% in November.

"Apart from the 2005 cohorts where [Ginnie Mae] speeds are slightly slower than conventional speeds, the Ginnie-conventional prepayment gap increased by almost 1 CPR from the previous month," the Bear Stearns analysts said.

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