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Prepayment Speeds Surge in December

Prepayment rates for 30-year mortgage loans in Fannie Mae and Freddie Mac mortgage-backed securities rose 13% in December, according to the Bear Stearns Prepayment Commentary.

The aggregate speed of 30-year Fannie Maes stood at a constant prepayment rate of 9.0 CPR, up from 7.7 CPR in November, and 8.4 CPR for comparable Freddie Macs, up from 7.6 CPR in November.

Bear Stearns senior managing director V.S. Srinivasan said the company believes the December prepayment report "reflects some of the early response" to the rally in mortgage rates that began in late November.

"Given the low level of mortgage origination activity, the lag between changes in rates and the ensuing prepayment response has likely decreased," he said.

Prepayments on 15-year Fannie Mae and Freddie Mac collateral rose by 9% in December, with Fannie speeds climbing from 8.3 CPR to 9.2 CPR and Freddie speeds increasing from 8.1 CPR to 8.7 CPR.

Ginnie Mae speeds rose 9%, with the biggest percentage increase coming in the 6.0% coupons of 2007, Bear Stearns reported. The speeds jumped from 5.5 CPR in November to 11.7 CPR in December and are running nearly 2 CPR faster than comparable Fannies and Freddies.

"While some of this increase can be attributed to the recent rally in rates, we believe that servicer buyout activity probably contributed significantly as well," Mr. Srinivasan said.

The Bear Stearns analyst predicted that the January prepayment report would show a 10% rise in speeds in response to several factors: the full effect of the rally in rates, a one-day increase in the business calendar, and a likely rush in refinancings as originators try to complete as many as possible before a change in the delivery fee structure for the government-sponsored enterprises takes effect in March.

"However, given today's extraordinary housing conditions and structural changes to the underwriting process, the refinance response to a rally in rates is likely to be significantly less than suggested by recent history," Mr. Srinivasan said. "We continue to believe that the refinancing curve in 2008 will be flatter than any time since the mid-1990s."

In other prepayment-related news, the National Bank of Kansas City, Overland Park, Kan., has introduced a recovery program by its mortgage division to help borrowers hurt by the turmoil in the subprime mortgage market.

Under the program, the bank will review prepayment penalties and other loan terms such as adjustment dates and variable rates, and counsel the borrower about the loan and the available options.

"With so many stories in the media regarding subprime loans, refinancing, FHA loans, rate freezes and foreclosures, consumers are confused about their options," said Todd Geiman, executive vice president of the Kansas bank's mortgage division. "... Many homeowners don't even realize they fall in the subprime category." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/