Prepayment Rates Continued to Fall Late in 2007

Prepayment rates for 30-year mortgage loans in Fannie Mae and Freddie Mac mortgage-backed securities declined in November by 6% and 8%, respectively, according to the Bear Stearns Prepayment Commentary.

The aggregate speed of 30-year Fannie Maes was a constant prepayment rate of 7.7 CPR, down from 8.4 CPR in October, and 7.6 CPR for comparable Freddie Macs, down from 8.1 CPR in October.

Meanwhile, however, prepayments on Fannie 2005 and 2006 7% coupons plummeted 47%.

Bear Stearns analysts Dale Westhoff and Steven Bergantino said Fannie Mae has attributed the previous prepayment variability in the 7.0s to the removal of delinquent loans from MBS pools, and that the procedure for removing such loans would be changed to lessen this effect.

"Presumably, this month's large decline is the result of [Fannie's] new toned-down buyout policy for delinquent premiums," the Bear Stearns analysts said. "Hopefully, December prepayments will confirm this hypothesis and eliminate the need for any further reporting on the misbehavior of these cohorts."

Prepayments on 15-year Fannie Mae and Freddie Mac collateral fell by 7% in November, with Fannie speeds declining from 8.9 CPR to 8.3 CPR and Freddie speeds decreasing from 8.8 CPR to 8.1 CPR.

"Pools backed by 15-year collateral continue to exhibit a better convexity profile than their 30-year counterparts (i.e., faster prepayments on discounts and slower prepayments on premiums)," the Bear Stearns analysts said.

The analysts said the recent downward trend in interest rates means that investors should consider the possibility of an increase in prepayments. The 30-year mortgage rate had declined from 6.5% in early October to 6.1% in early December.

"This has increased refinancing exposure from 10% of the mortgage universe to 25% as the $700 [billion] 6% coupon moves into the refinancing window for the first time in nearly two years," they reported.

In other prepayment-related news, the Federal Reserve Board is proposing rules to restrict subprime lending practices and "unfair and deceptive" practices linked to servicing, mortgage broker fees and appraisals.

The proposal, made under the Home Ownership and Equity Protection Act, would require prepayment penalties to expire 60 days before the first monthly increase in payments for subprime and higher-priced alternative-A mortgages.

It would also create an ability-to-repay standard, curb stated-income lending and mandate escrow accounts for at least 12 months for such mortgages.

Meanwhile, the House Judiciary Committee approved a bankruptcy bill in December that would give certain subprime and nontraditional mortgage borrowers facing foreclosure a chance to restructure their loans and allow bankruptcy judges to waive prepayment penalties.

Judges would also be authorized to "cram down" the mortgage amount to the fair market value and reduce the interest rate to a conventional rate plus a risk premium.

The restructurings would be limited to subprime and nontraditional mortgages originated since 2000.

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