Ides of March Portend Higher Prepay Speeds

Some analysts were predicting a significant increase in prepayment rates in March for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities.

In the Mortgage Strategist, UBS Investment Research analysts forecast that March speeds would climb about 30%. (The deadline for this column preceded the release of agency prepayment rates for March.)

"Discount speeds will mostly be boosted by an increase in day count (22 vs. 19) and seasonality," the UBS publication said. "Given the extra capacity and empty pipeline in the mortgage industry, we expect the lag between refinance response and recent rally to be short."

The analysts predicted that premium Fannie Mae speeds, especially vintage 2006 6.0% and 6.5% coupons, would experience an increase in constant prepayment rates of 3-5 CPR, to 13.5 and 22.0 CPR, respectively. Their projection for the average speed of Fannie Mae 7.0s was 19.0 CPR.

"At the moment, we have not seen any evidence that the liquidity squeeze in the subprime market is spreading into the prime market, although marginal alt-A borrowers could show less refinance response due to lack of [home price appreciation]," they declared.

Looking out another month, the UBS analysts were forecasting that April prepayments would fall 3%-5% from their levels in March.

"Two fewer business days should reduce discount speeds by 7% to 10%," they said. "On the other hand, the ongoing rally could continue to boost premium speeds by 5%."

RBS Greenwich Capital, in its U.S. ARMs Strategy, also foresaw a sharp increase in prepayments for March.

Focusing on agency hybrid speeds, it projected a 30%-35% jump, citing "faster prepayment seasonality effect in March, a three-day higher business day count and slightly higher refinancing volume in February."

Echoing the UBS forecast, the RBS Greenwich Capital publication also predicted a slowdown in April because of fewer business days that "could offset its faster seasonality effect."

In February, prepayment rates for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities had declined about 12%.

Bear Stearns & Co. attributed the speed decline to a 10-basis-point rise in mortgage rates, slower seasonal housing activity, and fewer business days.

"The big story, however, was in the 2006 production 30-year 6.0% and 6.5% coupons, where large declines of from 3 to 4 CPR were visible," said Bear Stearns analyst Dale Westhoff. "The move higher in rates had its biggest impact on the 6.0% coupon, moving it marginally out of the refinancing window."

As an example, the analyst cited the speeds of the 2006 Fannie Mae 6.0, which fell from 13.9 CPR in January to 10.0 CPR in February.

Mr. Westhoff said 30-year mortgage rates would have to drop to 5.70% to prompt another "major surge" in refinancing.

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