January Rate Drop Yields Modest Increase in Speeds

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

The aggregate speed of 30-year Fannie Maes stood at a constant prepayment rate of 9.6 CPR, up from 9.0 CPR in December, and 9.0 CPR for comparable Freddie Macs, up from 8.4 CPR in December.

Bear Stearns senior managing director Dale Westhoff said the increase in speeds was concentrated in 2006 and 2007 vintage 5.5s and 6.0s, while speeds declined for more seasoned coupons.

"While the average six-week lagged mortgage rate of 6.14% for the current reporting cycle represented the most attractive refinancing opportunity to date for the 2006 and 2007 vintages, it is still significantly higher than the 5.6% mortgage rate that more seasoned cohorts saw during the fourth quarter of 2005," Mr. Westhoff said.

The Bear Stearns analyst said tighter underwriting guidelines and the sinking housing market "have muted the refinance response" to the decline in rates. He noted that mortgage rates had fallen 30 basis points between the November and January reporting periods.

"This drop in rates has produced a modest 5 CPR prepayment increase on 2006 [Fannie Mae] 6.0s and only a 3 CPR increase on 2006 [Fannie Maes]," Mr. Westhoff said. "Throughout the 2004/2005 period we would have expected at least a 10-12 CPR response to a similar rally in rates."

The Bear Stearns analyst said the fact that the 30-year conventional mortgage rate had dropped below 5.65% for the first time since early 2005 would lead one to expect a sharp increase in refi activity.

"However, despite the fact that more than 50% of outstanding mortgage have mortgage rates that are 40 bps or more above current rates, we do not expect the resulting refinancing surge to match the magnitude or intensity of prior refinancing waves from the last decade," he declared.

This can be ascribed to various factors, including tighter underwriting guidelines at the government-sponsored enterprises, higher "friction costs" due to new or increased delivery fees, and less capability on the part of borrowers to extract equity from their homes.

In other prepayment-related news, Moody's Investors Service recently reported that the speeds of subprime mortgage loans originated since mid-2005 have been "materially slower" than for loans originated between 2002 and mid-2005 at similar points.

The report, titled "Slowdown in Prepayment Speeds for Subprime ARM Loans," said Moody's expects prepayment rates on pools of subprime mortgages to remain low "as highly leveraged borrowers struggle to find refinancing opportunities" in a weak housing market under tighter underwriting standards.

"This slowdown in prepayments, if it persists, will be one of the contributors to potentially higher losses for subprime RMBS transactions as many borrowers, unable to make the higher post-reset payments and unable to refinance their mortgages, start to default," Moody's says.

In another recent development, Buckley Kolar LLP reported that a judge in Massachusetts had temporarily barred Fremont Investment & Loan from initiating or advancing foreclosures on "presumptively unfair" adjustable-rate mortgage loans unless certain conditions were met.

One of the factors cited in the court's definition of presumptively unfair loans was the existence of certain kinds of prepayment penalties.

In granting the state attorney general's motion for a preliminary injunction, the judge found that there was no evidence that Fremont had made false representations or violated any federal or state consumer credit law, the law firm reported.

Rather, the court found that the loans at issue fell within the "penumbra" of a state predatory-lending law governing high-cost mortgage loans. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/