Prepay Rates Slow Modestly Despite Rate Dip
The speeds of 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities fell modestly in January, driven by a seasonal decline in turnover that offset a 15-basis-point rally in mortgage rates, according to the Bear Stearns Prepayment Commentary.
The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 11.5 CPR, down from 12.0 CPR in December vs. 10.2 CPR for comparable Freddie Macs, down from 11.1 CPR in December, Bear Stearns analysts Dale Westhoff and V.S. Srinivasan reported.
"The biggest surprise in today's numbers was the decline in prepayments in higher coupons in the face of a significant rally in mortgage rates," the analysts said, noting that the rally exposed mainly newly originated mortgages backing 6.0% and 6.5% coupons.
"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." Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral declined by 9% in January. For 15-year Fannie Mae and Freddie Mac collateral, overall speeds declined by 6%, comparable to the falloff in 30-year speeds.
Prepayments in the agency hybrid sector fell "slightly more" than those of comparable fixed-rate collateral, the Bear Stearns analysts reported. Hybrid ARM speeds are "considerably slower" than a year ago, adjusted for relative coupon and seasoning.
Turning to the near-term prospects for MBS prepayment rates, the analysts predicted that the February report will show a 12%-15% decline in speeds, citing a two-day decrease in the business calendar and higher mortgage rates.
"Over the last few weeks, the complexion of the mortgage market has changed significantly," they declared. "The 30-year mortgage rate has increased back to near its average for 2006 (6.35%), and the probability of a [Federal Reserve Board] cut in rates has been completely removed from the market. This greatly reduces the likelihood of an MBS refinancing event in 2007."
In other prepayment-related news, New York-based Andrew Davidson & Co. recently introduced the Loan Dynamics Model, which projects delinquency, default and loss severity, as well as prepayment on non-agency mortgage loans.
The company said the new model addresses "the mounting needs of firms that issue or invest in credit-sensitive mortgages and related securities" like alternative-A, high loan-to-value and subprime loans.
Andrew Davidson, president of the firm, said that while prepayment models have become "quite sophisticated" over the past 20 years, credit modeling has not advanced to the same level.
"Our new Loan Dynamics Model provides a unified framework for analyzing and modeling the prepayment and default characteristics of a loan," he said. "The Loan Dynamics Model incorporates the best features of traditional roll-rate models and discrete choice models." Meanwhile, Fitch Ratings has updated its prepayment assumptions for subprime residential MBS.
The rating agency said it has lowered the prepayment assumptions by 10%, citing "slowing subprime prepayment speeds that have accompanied slower home price growth."
The assumptions are used when rating RMBS deals with senior/subordinate structures that include overcollateralization amounts, which Fitch said are typical in subprime securitizations. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com