Analysts See 'Modest' Growth in February Prepays

Prepayment rates for conventional 30-year fixed-rate mortgages in agency mortgage-backed securities recorded "modest gains" in the February reporting period, according to Bear Stearns & Co.

Overall speeds for 30-year collateral came in at a constant prepayment rate of 11.2 CPR for Fannie Maes, up 0.5 CPR from January's level, and 9.7 CPR for Freddie Macs, up 0.7 CPR, Bear Stearns analysts Dale Westhoff and V. S. Srinivasan reported.

Prepayments on 30-year Freddie collateral rose a little more than for corresponding Fannie collateral, but continued to be "marginally slower" across most coupons and vintages, the analysts said.

The main source of the differences between Fannie and Freddie speeds is that Fannie Mae pools have a higher percentage of loans with nonstandard borrower characteristics, the analysts said. "Absent a slowdown in the housing market, these differences are likely to persist," they observed.

For 15-year mortgages, speeds increased less than for 30-year collateral. Overall, 15-year Freddie Mac speeds rose from 8.3 CPR in January to 8.9 CPR in February, while Fannie Mae speeds held steady at 9.4 CPR, according to Bear Stearns.

The analysts noted that 15-year Freddie discount coupons are paying on par with comparable Fannie discounts across most coupons and vintages, in contrast with the 30-year sector.

"The 15-year sector attracts borrowers who are willing to take on a higher monthly payment in order to build equity and pay off their debt," analysts Westhoff and Srinivasan said. "These borrowers are less likely to have nonstandard characteristics, decreasing the potential differences in borrower attributes between the agencies."

Meanwhile, overall speeds for 30-year Ginnie Mae collateral held fairly steady, with discount coupons rising by over 10% and premiums recording comparable declines.

"The March prepayment report should reflect the onset of the spring/summer increase in housing turnover activity, which should be a barometer for the housing market and expectations for discount speeds through the summer months," the analysts said.

They predicted an increase of over 25% in March prepayments.

The February prepayment report contrasted sharply with the January report. The speeds of 30-year fixed-rate agency mortgages fell 23% in January, chiefly as a result of a seasonal slowdown in housing turnover and refinancing activity over the holiday season, according to Bear Stearns.

Citing the 5.7 CPR for mortgages in Fannie Mae 4.5% MBS, analysts Westhoff and Srinivasan pointed to the extension risk "looming" over the fixed-rate mortgage market.

"Even if the housing market remains relatively strong, speeds on deep discount mortgages are likely to converge to their historical norms as cash-out refinancing becomes uneconomical, forcing borrowers to look at second-lien mortgages and home-equity lines of credit as alternative ways to tap the equity appreciation in their property," the analysts said.

For 15-year Fannie Mae and Freddie Mac collateral, speeds decreased by 2.1 CPR overall in January, compared with a 3.1 CPR overall decline for 30-year mortgages, the Bear Stearns analysts reported.

In other prepayment-related news, Friedman Billings Ramsey & Co. reported that speeds of subprime residential MBS continued to fall in January despite the decline in subprime mortgage rates.

FBR said subprime rates declined 9 bps for the A-minus credit grade during January's refinance window, 13 bps for the B credit grade and 42 bps for the C credit grade.

FBR forecast further slowing of subprime residential MBS speeds in February based on an expected rise in subprime rates and weaker seasonal factors.

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