Long Month Boosts Prepayment Rates

Prepayment rates on the collateral in agency mortgage-backed securities rose nearly 8% across the coupon stack in August, but the speedup was probably just an artifact of a longer reporting period, according to Bear Stearns.

The August reporting period had three more business days than the July period, said Dale Westhoff and V.S. Srinivasan, senior managing directors at Bear Stearns.

Pointing to a forthcoming three-day decline in the number of business days in the September reporting period, the Bear Stearns analysts predicted that speeds would fall 10% next month, despite a recent 20-basis-point drop in mortgage rates.

Overall speeds on Fannie Mae 30-year MBS collateral increased from a constant prepayment rate of 10.7 CPR in July to 11.5 CPR in August, and the comparable Freddie Mac speeds rose from 9.7 CPR to 10.5 CPR, they reported.

For 30-year Ginnie Mae collateral, aggregate speeds rose 9%, from 14.5 CPR to 15.8 CPR.

The analysts noted that Ginnie Mae speeds remained "significantly faster" than those of conventionals for most cohorts originated before 2005. But they said structural changes in the Federal Housing Administration program, combined with the state of the housing market, are likely to keep speeds on this year's Ginnie Maes slower that those of comparable Fannies and Freddies.

Meanwhile, prepayments in the agency hybrid sector rose about 9% in August, but even with this increase, discount speeds (adjusted for relative coupon and seasoning) are still slower than last year's, they reported.

In a separate report on short-term prepayment estimates, the Bear Stearns analysts argued that leverage will be the key to a borrower's prepayment behavior as the housing market enters a period of "stagnating" home prices.

"Highly leveraged borrowers that were supported by ever increasing home prices and a long menu of low payment, cash-out refinancing alternatives will likely exhibit the greatest extension risk over the next 12 months as the repeating cycle of equity buildup and cash-out refinancing finally ends," Mr. Westhoff and Mr. Srinivasan said.

"This leveraged vs. non-leveraged prepayment dichotomy will play out across multiple dimensions including high LTV vs. low LTV loans, new vs. seasoned vintages, purchase vs. refinanced loans, non-amortizing vs. amortizing products, California vs. non-California originations and [Ginnie Mae] vs. conventional loans."

The Bear Stearns analysts said discount speeds have been "significantly faster" than historical norms for a strong home price appreciation environment. But they have been "even more pronounced" in the Ginnie Mae sector.

"Most of this change can be explained by a strong housing market that has increased cash-out refinancing activity to unprecedented levels," they said.

This "disproportionate impact" stems from the "unique profile" of the Ginnie Mae borrower and the terms of the Federal Housing Administration mortgage insurance program, which "increases the incentive to refinance as a way to eliminate onerous mortgage insurance premiums," the analysts said.

In other prepayment-related news, subprime residential MBS speeds generally declined in July as "higher mortgage rates in July's refinance window offset strong seasonal turnovers," said analysts at Friedman Billings Ramsey & Co.

"We expect the downward trend to continue in August, reflecting the sharp increases in subprime mortgage rates," the FBR analysts said in the report, titled Subprime RMBS Performance in July 2006: Defaults, Loss Rates and Prepayments. "Subprime mortgage rates spiked during August's refinance window: subprime mortgage rates rose 20 [basis points] for the 'A-minus' credit grade, 18 bps for the 'B' credit grade and 19 bps for the 'C' credit grade." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com