Housing Turnover Fuels Rise in Prepayments

Prepayment rates on 30-year fixed-rate mortgages in Fannie Mae and Freddie Mac mortgage-backed securities increased by a constant prepayment rate of 1.2 in May, or 11%, according to the Bear Stearns Prepayment Commentary.

Overall speeds on 30-year Fannie Mae collateral came in at 12.6 CPR for the month, while speeds for comparable Freddie Mac mortgages averaged 11.2 CPR, Bear Stearns senior managing directors V.S. Srinivasan and Dale Westhoff said in the report.

The increase in prepayment rates was "uniformly distributed" across coupons, the Bear Stearns analysts reported.

"A seasonal increase in housing turnover activity and a two-day increase in the business calendar more than offset the 12-bp increase in mortgage rates," the analysts said.

Freddie Mac 30-year speeds rose a bit more than those of corresponding Fannie Maes, but were still "marginally slower" for most vintages and coupons, they reported.

For example, prepayments on the benchmark 2003 Freddie 5.0s stood at 10.2 CPR, up 1.4 CPR and not far below the 10.6 CPR recorded by the 2003 Fannie 5.0s.

"The difference in prepayments across the GSEs is generally more pronounced in cuspy coupons and converge for deep discounts," the Bear Stearns analysts said.

Prepayments on 15-year Fannie Mae and Freddie Mac collateral increased by 10% overall, comparable to the rise in 30-year speeds.

Agency hybrid speeds climbed more than those of their fixed-rate counterparts in May. But the analysts reported that, adjusted for relative coupon and seasoning, hybrid speeds are more than 10% slower than they were a year ago despite the fact that hybrid ARMs "continue to pay significantly faster" than fixed-rate mortgages.

Meanwhile, prepayments on 30-year Ginnie Mae collateral rose from 15.8 CPR to 16.9 CPR in May, a 7% increase. The largest percentage increases were posted by the discount 4.5% and 5.0% coupons.

Ginnie Mae speeds are "significantly faster" than those of conventionals for deep discounts, but they converge for higher coupons, the analysts reported.

"These differences have narrowed significantly in the more recent originations, suggesting that the [Ginnie Mae] program changes in 2005 are having an impact," the Bear Stearns analysts observed.

Noting that the 30-year conventional mortgage rate had been "hovering near the 6.70% mark," the analysts said the "dominant factors" driving coupon speeds as long as rates persist at that level are likely to be "the level of rate 'lock-in' and the strength of the housing sector."

"With the average borrower now holding a 6.0% mortgage, lock-in is the strongest it has been since 2000 (i.e. most borrowers have no refinancing options within the traditional amortizing ARM or fixed-rate mortgage sectors)," the analysts said. "Thus, as the housing sector recedes from its record pace of recent years, we expect prepayments across the coupon stack to converge toward historical norms."

In other prepayment-related news, Friedman Billings Ramsey & Co. reported that the speeds of subprime residential MBS rose somewhat in April despite stagnant mortgage rates.

Increases were recorded in all origination years from 2000 through 2006 for both fixed-rate and adjustable-rate subprime RMBS, the company said.

FBR predicted that subprime speeds would continue to increase in May due to slightly lower rates, three additional business days and "stronger seasonal factors." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com