Prepayment Activity Is Starting to Heat Up Again

Prepayment rates for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities reversed course in October, rising 14%.

The reversal was attributable to three extra business days and a decline in mortgage rates, according to the Bear Stearns Prepayment Commentary.

The aggregate speed of 30-year Fannie Maes came in at a constant prepayment rate of 8.4 CPR, up from 7.4 CPR the previous month, while comparable Freddie Macs recorded an 8.1 CPR, up from 6.9 CPR in September.

However, the higher speeds "should be viewed as a blip in an otherwise negative outlook for prepayments," said Bear Stearns analysts Steve Bergantino and Dale Westhoff. "In November, a seasonal slowdown in turnover activity and a two-day decline in the business calendar should take back October's prepayment increase."

The analysts said the ramp-up in speeds was "more pronounced on higher coupons and more recent vintages" as prepayments on 2006 Fannie 6.5s shot up 28% compared with just an 8% rise in 2005 Fannie 5.0s.

Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral were "virtually unchanged" in October, but remained higher than conventional speeds, the analysts said.

In September, overall speeds on 30-year mortgages in Fannie Mae and Freddie Mac MBS dropped 19%, resulting from a shorter business calendar, lower seasonal turnover activity, a deteriorating housing market and tighter underwriting standards, according to Bear Stearns.

Aggregate speeds on 30-year Fannie Mae collateral fell to 7.4 CPR in September (vs. 9.2 CPR in August), while speeds on 30-year Freddie Mac collateral slowed to 6.9 CPR (vs. 8.9 CPR in August), Mr. Westhoff, Mr. Bergantino and analyst V.S. Srinivasan reported.

"We have now seen three consecutive months with aggregate 30-year prepayment rates below 10 CPR," the analysts said. "Absent a Fed-driven rally in mortgage rates, this trend will continue, bringing overall agency prepayment rates to their lowest levels since the mid 1990s." The slowdown was "fairly uniform" across the coupon stack, with the "notable exception" of Fannie Mae 7.0s.

"Something mysterious is happening in this coupon, especially in the 2005 and 2006 vintages," the analysts said. "Prepayments on these cohorts have displayed a sawtooth pattern over the last few months, spiking in July, crashing back down in August, and then spiking again this month."

For example, 2006 Fannie Mae 7.0s recorded speeds of 23, 40, 20 and 28 CPR between June and September, they reported, adding that Fannie "has offered no explanation on these erratic numbers."

Meanwhile, 30-year Ginnie Mae speeds fell by 7%, "significantly less" than the speeds in the 30-year conventional sector.

The "one surprise" in the report was a "sharp increase" in the speeds of Ginnie 6.0s, the Bear Stearns analysts said. (For example, the speeds of 2006 Ginnie 6.0s rose from 7.9 CPR in August to 13.6 CPR in September.)

"We suspect most of this increase can be attributed to servicer buyout," the analysts said.

In other prepayment-related news, First American LoanPerformance, a San Francisco-based provider of residential mortgage data and analytics, recently made enhancements to TrueStandings Securities, a Web-based business intelligence platform that provides loan-level access to the company's mortgage securities database.

The company said the enhancements include a new in-progress period reporting function offering the earliest view of performance and prepayment information on 80% of active pools. The information is now available up to 12 business days earlier than previously possible, the company said.

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