Prepayment Rates Slowing to Lowest Rate Since Mid-90s

Prepayment rates on 30-year fixed-rate mortgages in agency mortgage-backed securities fell 10% in July, and the Bear Stearns Prepayment Commentary has predicted that speeds will slow (on a rate-adjusted basis) to their lowest levels since the mid-1990s.

"Despite seasonal factors, the cooling housing market pushed discount speeds lower by 10%, while premium speeds reacted to the 30-bp increase in mortgage rates," said Bear Stearns analysts Dale Westhoff and V.S. Srinivasan.

Overall, 30-year Fannie Mae collateral recorded a constant prepayment rate of 9.7 CPR for the month, down 1.2 CPR from that of June, while the aggregate speed of 30-year Freddie Mac collateral stood at 9.3 CPR, down 1.0 CPR from that of the previous month.

"One of the biggest surprises in this month's report was the almost 40% increase in prepayments on the [Fannie Mae] 7.0% coupon," the Bear Stearns analysts declared.

Aggregate speeds on Fannie Mae 7.0s rose from 19.7 CPR in June to 27.6 CPR in July, while speeds on Freddie Mac 7.0s fell from 20.8 CPR to 20.2 CPR in July.

The analysts noted that Fannie Mae had said in an Aug. 3 news release that some MBS might experience higher prepayments beginning in August as a result of a recent clarification of servicing guidelines.

"As part of this update, [Fannie Mae] has automated the repurchase of delinquent loans in MBS pools that have missed four or more consecutive installments and have met the new servicing guidelines," they said. "Given the size of the anomalous prepayment numbers in this report, our guess is that the problem may be linked to the implementation of this new, automated system."

In the June reporting period, Bear Stearns analysts reported that rates for 30-year mortgages in Fannie Mae and Freddie Mac MBS fell by 8%.

"This slowdown comes at what should be a seasonal peak in turnover activity (June/July) and before the full effect of the recent backup in mortgage rates has had a chance to show up in reported prepayment numbers," said Mr. Westhoff, Mr. Srinivasan and Steven M. Bergantino.

"... Thus, as the combination of higher rates and tighter underwriting standards begin to take their toll on the prepayment outlook, mortgage investors are faced with the prospect that prepayments will slow to their lowest levels in over a decade."

Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral declined 5% in June, the analysts said.

The aggregate speed of 30-year Fannie Maes stood at 10.9 CPR in June, down from 11.9 CPR in May, and 10.3 CPR for comparable Freddie Macs, down from 11.2 CPR in March.

"These are the slowest aggregate 30-year prepayment speeds since December 2000," the analysts reported.

On the political front, Sen. Hillary Clinton, D-N.Y., recently called for a ban on prepayment penalties as part of a crackdown on certain lending practices that many observers have deemed abusive.

In a speech setting forth legislative proposals she said she would introduce when Congress returns in September, the Democratic presidential candidate also advocated upfront disclosures of broker compensation. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/