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Prepay Speeds Decelerate in June

Prepayment rates for mortgage-backed securities fell 9.5% overall in June from a constant prepayment rate of 13.1 CPR to 11.9 CPR, according to Credit Suisse.

Writing in the "June 2008 Fixed Rate Prepayment Commentary," Credit Suisse researchers Mahesh Swaminathan and Chandrajit Bhattacharya reported that the speeds of 30-year 2007 5.5% coupons slowed by a constant prepayment rate of 1 CPR, while 6.0% and 6.5% coupons declined 3 CPR.

The Credit Suisse analysts also reported that the estimated net issuance of fixed-rate MBS declined from $67.5 billion in June to $58.9 billion, a decrease of 12.8%.

The estimated net issuance of 30-year Fannie Mae and Freddie Mac MBS fell from $47.4 billion to $39.6 billion, while estimated issuance of 30-year Ginnie Mae securities jumped from $14.6 billion to $18.6 billion, they said.

The Credit Suisse analysts predicted that speeds would decline further in July.

"Despite an increase in day counts in July, we expect prepayments on moderately seasoned premium paper to decline by 15-20% for 30-year coupons and by 19-24% for 15-year coupons in light of the [40 basis-point] increase in mortgage rates during June," the analysts said. "Speeds on seasoned discounts are expected to decline more modestly, by about 5-10% during the same period."

In other prepayment-related news, Barclays Capital reported that new loan-level disclosures from Freddie Mac have shed light on sources of credit impairment other than FICO scores and loan-to-value ratios.

Writing in US MBS Strategy, Barclays analysts Nicholas Strand, Derek Chen and Matthew Seltzer said credit impairment "has been the dominant driver of prepayments over the last year, as falling home prices have made it more difficult for many borrowers to get new loans.

Over this period, borrowers with high LTV loans and low FICO scores have seen their ability to refinance their mortgage wither away."

As a result, prepayments have "sharply" declined for pools with these attributes, they reported.

But there are "many ways for borrowers to be credit impaired" other than having low FICO scores or loans with high LTVs, the Barclays analysts said.

An analysis of Freddie Mac's new loan-level disclosures suggests that the existence of a piggyback loan, above-average debt-to-income ratios, and first-time-homeowner status are associated with "weaker prepayment behavior," according to the analysts.

Barclays said it found that first-time homeowners had prepayments for premium loans that were 2-8 CPR slower than comparable borrowers, and that the prepayment behavior of borrowers with second liens is very similar to that of borrowers with high-LTV first liens.

In addition, low DTI borrowers "seem" to prepay at "moderately higher" rates than average borrowers, they said.

"However, surprisingly, borrowers with higher DTIs, 55% and greater, do not seem to show appreciably slower prepayments," the analysts reported. "Overall, borrower prepayment behavior seems to only be mildly affected by their DTI." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/