Analysts Expect Prepays Lower, Buyouts Higher

In its Prepayment Commentary for August, Barclays Capital says prepays are down and buyouts are up.

According to analysts in securitization research, Fannie Mae 30-year paydowns dropped 21% in the August report, reflecting 53 basis points higher, driving rates and a significant drop in refinancing applications.

"Decelerations were most pronounced in lower coupons, with the 2006-07 production 5s and 5.5s slowing 6-9 CPR. Overall, actual speeds were very close to our projections," wrote Derek Chen, one of the report's authors.

"As expected, delinquency buyouts showed up for the first time. These, together with incremental improvements in HARP, pushed 2006-07 6.5s and 7s 1-4 CPR faster despite much higher mortgage rates."

Analysts here said delinquency buyouts should ramp up quickly over the next couple of months, adding about 2 CPR to FNMA 30-year speeds in the September report and about 3 CPR in October." For the 2006-07 6.5s, this means a 7-9 CPR pick-up from buyouts," the report said.

They anticipate that for the next prepay report, lower coupons (4.5s through 5.5s) should continue to slow due to abated refinancing activities, while higher coupons (6.5s and above) should speed up on higher buyouts. "Overall, we expect a 10%-15% drop in FNMA 30y paydowns," the report said.

Given the sharp backup in rates (5.59% for the August report vs. 5.05% for July), Barclays Capital said prepayments dropped, but to a lesser extent than implied by the MBA refinancing index. "The six-week lagged four-week average of the refinancing index declined 51%. But 30-year FNMA speeds only dropped 21% because of a significant buildup in originators' pipelines, and many borrowers who locked in low mortgage rates during April and May still had time to exercise their options to close," the analysts wrote.

The slowdown was most pronounced for newer-vintage lower coupons, according to Barclays Capital not only because they are "on the cuspy part of the S-curve, but also because they are naturally more responsive to rates because of larger loan sizes and better credit profiles. As a result, 5s and 5.5s slowed 6-9 CPR, a 20%-30% drop."

On the other hand, the analysts wrote, "credit-impaired coupons (2006-07 6.5s and 7s) were much less sensitive to rates because they have a flatter S-curve and probably benefited from marginal improvements in HARP implementation.

Moreover, modification-related buyouts (after the completion of the three-month trial period) finally showed up, adding 1-2 CPR to higher coupons.

As a result, the 2006-07 6s through 7s accelerated 1-4 CPR in spite of much higher mortgage rates."

For the September report, Barclays Capital expects this trend will keep up, with lower coupons (4.5s through 5.5s) slowing due to abated refinancing activities, while higher coupons (6.5s and above) accelerate thanks to more buyouts.

"Overall, we expect a 10%-15% drop in FNMA 30-year paydowns," the analysts at Barclays Capital noted.

In July overall fixed-rate prepayments declined 20% to a 20.6 conditional prepayment rate from 25.8 CPR, based on the July 2009 Fixed-Rate Prepayment Commentary from Credit Suisse.

In its issuance observations, Credit Suisse said estimated new origination July fixed-rate net issuance declined $11 billion from $80.5 billion to $69.5 billion after excluding seasoned loan securitizations of $33 billion and $5 billion in June and July, respectively.

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