Prepayments Slow after February Surge
Overall prepayment rates for mortgage-backed securities fell 6.9% in March after surging 52% in February, suggesting that speeds "were front-loaded in February, most likely as originators tried to avoid the new delivery fees applicable from March," according to Credit Suisse.
Writing in the company's "March 2008 Fixed Rate Prepayment Commentary," Credit Suisse researchers Mahesh Swaminathan and Chandrajit Bhattacharya reported that the speeds of 30-year vintage 2006 and 2007 5.5s and 6.0s backed by "highly creditworthy borrowers" fell by constant prepayment rates of 5 CPR to 6 CPR.
This represented a reversal of the spike in February, they noted.
"In contrast, the prepayment profile on 6.5s and 7s backed by weak borrowers has remained stable over the past three months," they said.
"We believe the prepayment spike in February and the subsequent drop-off in March on 2007 and 2006 vintage 5.5s through 6s was due to a front loading of closings in February."
The Credit Suisse analysts reported that the estimated net issuance of fixed-rate MBS fell to $38.1 billion in February, a decline of 24% from $50 billion in January, while the net issuance of 30-year Fannie Mae and Freddie Mac MBS fell from $47.6 billion to $19.5 billion.
The prepayment report points to the fact that extension risk is currently the "prevalent risk," especially in the 30-year 5.0% and 5.5% coupons, they said.
"Incrementally larger rallies are necessary to elicit the same refinancing response," the analysts said. "As rates were reaching new lows in January, a 5.87% rate triggered a 3575 refi-index compared to only a 2636 print in late March for the same rate level."
The Credit Suisse analysts projected that prepayments would hold steady for premium coupons and rise by about 5% for discounts in April due to an additional two business days and a "slight increase in seasonality."
In other prepayment-related news, Barclays Capital reported that the best value among MBS backed by hybrid adjustable-rate mortgages are pools with three-year or five-year prepayment penalties.
In the April 14 issue of Mortgage Market Outlook, Barclays analysts also said the attractiveness of hybrids is likely to be enhanced by "the diminishing prepayment spike at rate reset." They reported that the reset spike "abruptly shrank about 10 CPR" in April.
"Rather than dismissing this as a random fluctuation in speeds, we view this as a precursor of a significantly diminished reset spike that should manifest itself over the next couple of months," they declared.
The reason for the diminished reset spike, the analysts said, is that mortgage rate resets for hybrid ARMs have declined as index rates (such as the London interbank offered rate or the constant maturity Treasury rate) fell along with short-term rates determined by the Federal Reserve Board.
The Barclays analysts said short rates will likely remain low for some time - citing their economists' forecasts of a 1.75% federal funds rate through early 2009 - which means the decreased reset spike is "likely to persist."
The market "does not seem to have fully priced this in," they said, predicting that the attractiveness of hybrids will increase further. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/