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Housing Turnover Drives up Prepayment Rate

Prepayment rates for 30-year mortgages in Fannie Mae mortgage-backed securities rose by 10% in December, driven by stronger-than-expected turnover, according to Bear Stearns & Co.

The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 12.0 CPR, up from 10.9 CPR in November, said Bear Stearns senior managing director Dale Westhoff. The aggregate speed for Freddie Mac 30-year collateral rose from 10.3 CPR in November to 11.1 CPR in December.

The speeds of discount coupons rose 5%-7% despite slowing seasonal factors, but these faster-than-expected speeds do not necessarily suggest a stronger housing market, according to Mr. Westhoff.

He said sellers have become more flexible on asking prices since the summer of 2006.

"As the housing market goes through this price discovery process, we are likely to see some rebound in home sales that counter seasonal effects," the analyst said.

In the long run, however, housing turnover and cash-out refinancing are driven by the rate of home price appreciation, he observed.

"We continue to expect home prices to stagnate through most of 2007 and discount speeds adjusted for relative coupon and seasoning to decline," Mr. Westhoff said.

As for 15-year collateral, the prepayment pattern was similar to that for 30-year mortgages, with speed increases for lower coupons and new-issue premiums and little change among seasoned premiums. Agency hybrid speeds also rose for most discount coupons and vintages, according to Bear Stearns.

Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral remained nearly unchanged in December.

In the November speeds report, Bear Stearns said prepayments on 30-year fixed-rate mortgages in agency MBS fell 5%, reflecting a seasonal slowdown in housing turnover as well as the short Thanksgiving week. The prepayment environment was compared to that in 1996.

MBS backed by 30-year Fannie Mae collateral recorded an overall constant prepayment rate of 10.9 CPR for November, down 0.8 CPR from that of October, Mr. Westhoff and senior managing director V.S. Srinivasan said. Comparable Freddie Mac collateral recorded an overall speed of 10.3 CPR, down 0.3 CPR from that of October.

Meanwhile, aggregate Ginnie Mae speeds fell by 5% in November, from 14.6 CPR in October to 13.8 CPR. The analysts noted that the 2005 Ginnie Mae cohort was paying faster than conventionals for most coupons.

The speeds of hybrid adjustable-rate mortgages decreased approximately 6% in November, but the decline was concentrated in discount coupons, the analysts reported.

"Adjusted for relative coupon and seasoning, discount hybrid ARM speeds are now 15%-20% below 2005 levels," Mr. Westhoff and Mr. Srinivasan said. "Even with this decline, hybrid ARM speeds continue to be significantly faster than their fixed-rate counterparts."

The overall November agency MBS speeds "support our current thesis that today's prepayment environment has important parallels to 1996," the Bear Stearns analysts said.

A 200-basis-point rally in mortgage rates in 1996, following the massive 1993 refinancing wave, produced "a notably muted refinancing response that stands out from all other refinancing events," the analysts said.

The current situation also involves a significant weakening of the housing market and follows a massive refi wave in 2003.

"The recent rally has exposed predominantly newly originated mortgages backing 6% and 6.5% coupons," the Bear Stearns analysts said. "These borrowers have seen little or no home price appreciation, reducing the cash-out incentive that has been such a critical component to the prepayment response in recent years." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com