Housing Turnover Continues to Boost Speeds

Prepayment rates on 30-year fixed-rate mortgages collateralizing agency mortgage-backed securities fell slightly in June, with stronger housing turnover offsetting some of the decline in refinancing, according to Bear, Stearns & Co.

Overall speeds on 30-year Fannie Mae collateral decreased by a constant prepayment rate of only 0.2 CPR (from 12.6 CPR to 12.4 CPR) and 30-year Freddie Mac speeds fell by only 0.1 CPR (from 11.2 to 11.1), analysts Dale Westhoff and V.S. Srinivasan reported.

"Looking across coupons, the deep discount 4.5% and 5.0% coupons posted moderate increases in prepayments while speeds on higher coupons declined marginally," the analysts said.

"Given the selloff in rates and seasonal changes from May to June we would have expected a small decline in speeds across the coupon spectrum," they said. "However, speeds on [Fannie] 4.5s and 5.0s increased by 0.6 and 0.3 CPR, respectively, suggesting strong housing turnover activity."

Speeds on 30-year Ginnie Mae mortgages declined by 5%, from 17.0 CPR in May to 16.1 CPR in June. Speeds on 30-year Freddie Mac mortgage collateral continued to be slower than Fannie Mae speeds for most coupons and vintages, but the differences were "less pronounced as we move down the coupon stack," the analysts said. And in the 15-year sector, there was "hardly any difference" in speeds.

"Most of the [Fannie-Freddie] speed differential can be attributed to cash-out refinancing, which is less likely to occur in the 15-year sector and in deep discounts," they said.

In other prepayment-related news, the Bear Stearns analysts reported in the July issue of Short-Term Prepayment Estimates that the overall mortgage market has not been this far out of the money (except for a four-week period in May 2000) since the "prehistoric mortgage market" of the 1970s and early 1980s.

"This is an amazing statistic when you consider that a 7.0% mortgage rate is still extremely low from a historical perspective," Mr. Westhoff and Mr. Srinivasan said. "The explanation is that the tremendous refinancing efficiency that characterizes today's mortgage market ensures that borrowers are deposited into the lowest possible coupons on every interest rate swing."

That happened in the second quarter of 2003, with a 5.25% mortgage rate, in the first quarter of 2004, with a 5.45% rate, and in the second quarter of 2005, with a 5.60% rate, they reported. "Thus, we now find that the average borrower holds a mortgage that is nearly 100 basis points below par," the analysts said.

The analysts also turned their attention to the debate over the probable severity of the housing correction. They noted that the consensus view is that home prices will continue to rise, though at a moderate pace, and that a severe housing recession is unlikely.

"In the near term, we subscribe to this view and expect home price growth to fall to the 4% to 5% range for 2006 versus over 12% in 2005...," they said. "Nevertheless, our short-term bearish view on the housing market is tempered by the strength of the U.S. economy."

Mr. Westhoff and Mr. Srinivasan said every sustained housing contraction since 1971 has coincided with a recession. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com