Housing Weakness Factors into Lower CPR Speeds

Prepayments on 30-year fixed-rate mortgages in agency mortgage-backed securities fell 5% in August, which analysts attributed to higher interest rates and continued weakness in the housing market.

According to the Bear Stearns Prepayment Commentary, Fannie Mae 30-year collateral recorded a constant prepayment rate of 9.2 CPR overall for the month, down from 9.7 CPR in July, compared with 8.9 CPR for 30-year Freddie Mac collateral, down from 9.3 CPR in July.

The slowdown was "fairly uniform" across the board, Bear Stearns said, with the "notable exception" of the Fannie Mae 7.0% coupon, on which speeds declined 10 CPR, nearly 36%. This followed an aggregate increase of nearly 10 CPR the month before on the Fannie 7.0s.

The cumulative speed declines on discount coupons in recent months have brought them to levels not seen in years.

"Discount speeds adjusted for seasoning, relative coupon and seasonal factors are now at the slowest levels since the mid-'90s," said Bear Stearns analysts Dale Westhoff and V.S. Srinivasan. "For example, fully seasoned [Fannie Mae] pools 25 and 75 bps below par prepaid at 11.9 and 9.4 CPR in the most recent report, compared to 18 and 12.5 CPR in August of 2006 and 13.8 and 11.2 CPR in August of 2000."

Meanwhile, overall speeds for 30-year Ginnie Mae collateral decreased by 3%. Speeds on vintage 2007 Ginnie Mae pools "are ramping up even slower than their conventional counterparts," the Bear Stearns analysts said. Several factors, including higher loan-to-value ratios and the weak housing market, are likely to be "a drag" on Ginnie Mae prepayments, they said.

The analysts added that servicer buyouts continue to keep speeds on premium Ginnie Mae coupons with more than 12 months of seasoning on par with or faster than comparable conventional coupons.

As for the 15-year sector, speeds are now about equal to or faster than those on 30-year mortgages nearly across the board, the Bear Stearns analysts reported.

"Over the last few years, speeds in the 15-year sector have trailed the 30-year sector by 1-2 CPR, mostly due to higher cash-out refinancing activity in the 30-year sector," they said. "As we transition to a weaker housing market, 15-year speeds have not slowed down as much as their 30-year counterparts."

In other prepayment-related developments, the idea of prohibiting prepayment penalties on subprime loans has gained considerable traction in Congress.

Brian Collins, MSN's Washington bureau chief, recently reported that Sen. Christopher J. Dodd, D-Conn., the chairman of the Senate Banking Committee, is working on a comprehensive bill that would, among other things, bar lenders from steering borrowers into subprime loans, impose a fiduciary duty on mortgage brokers, and ban prepayment penalties on subprime loans.

On the House side, he reported that members of the House Financial Services and House Judiciary committees have drafted a "narrowly tailored bill" to allow bankruptcy judges to modify so-called predatory mortgages, though many congressional observers think it has little chance of passing. One of the provisions of the bill would allow bankruptcy judges to waive prepayment penalties and spread principal payments over 30 years.

The Center for Responsible Lending in Oakland, Calif., has also advocated a prohibition on prepayment penalties for subprime loans in California, while calling on the state to set lending standards that qualify borrowers based on the fully indexed interest rate and verified income.

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