Prepayments Continued to Decline During September

In its September 2009 Fixed Rate Prepayment Commentary, Credit Suisse says its forecast for an increase of 10%-11% in September speeds on the heels of agency buyouts under HAMP did not pan out as it expected.

Researchers said they were surprised to find no noticeable mod-related impact on speeds in September and attribute it to some degree in how the duration of the trial period is being calculated by the agencies.

Authors of the report wrote about further uncertainty with regards to the timing of mod-related prepayments, which they say is caused by an up to two-month extension of the trial period afforded to borrowers for submitting required documentation, provided that the borrowers continue to remain current.

"Timing of buyouts is likely to get pushed out by another month or two depending upon the percentage of borrowers who do not provide documentation during the first three months, the additional time taken by borrowers to provide documentation, and the percentage of borrowers who fail to provide documentation," wrote one of the authors, Qumber Hassan.

The researchers at Credit Suisse believe that there will be strong political pressure against denying modifications to borrowers who are unable to fully document their income but remain current during the now extended trial period.

They say it is also possible that some of the borrowers who complete their trial period but fail to provide documentation are steered towards other modification programs by servicers, which is something industry insiders have also said at recent default servicing conferences.

"This will cause some delay in releasing full impact of HAMP, but the overall picture hasn't changed. Given the strong build-up in HAMP trial modification starts, we maintain our overall mod-related paydown forecasts but make some adjustments to the timing," said Mr. Hassan.

In September, overall 30-year fixed-rate prepayments declined 11% to a 12.7 conditional prepayment rate from 14.2 CPR in August, led by 10%-15% declines on 30-year 5.5s.

Fifteen-year prepayments posted smaller declines and were in line with our forecasts. "Overall, paydowns declined 3%-4% with no particular pattern in slowdown across different coupons or vintages," the researches noted.

Credit Suisse does not expect to see much change in valuations on higher coupons due to slower September prints since the overall outlook for agency buyouts has not changed materially, in its view.

The firm said it expects October speeds to increase by 15%-20% as a result of the recent rally in rates and mod-related prepayments coming through.

November speeds should be flat as higher mod-related prepayments plus residual pipeline from October is offset by a 10% lower day count, the report said.

"Our forecasts for the 'worst-to-deliver' 25% of the float across the 30-year and 15-year FNMA and gold coupon stacks are included in exhibits 11-14. The worst-to-deliver pools are identified as the 25% of the deliverable float with the largest/smallest refinancing incentive for premium/discount coupons, respectively. We anticipate that these metrics could be especially useful in valuing dollar rolls on coupons such as 30-year 5s, 5.5s, 6s and 6.5s which exhibit significant dispersion."

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