Prepayment Speeds Accelerate after Lagging Forecast in September
Prepayment rates for agency mortgage-backed securities shot up across the board in October, playing catch-up to analysts' forecasts after the slower-than-expected speeds recorded in September.
The numbers "substantiate the magnitude and breadth of the current refinancing wave," the Bear Stearns Prepayment Commentary reported.
Speeds of Fannie Mae and Freddie Mac 6.0%-7.0% coupons rose by constant prepayment rates of 9-15 CPR, analysts Dale Westhoff and Bruce Kramer said. New to moderately seasoned 30-year coupons in the 6.0%-7.0% range were paying from about 40 CPR to 65+ CPR, increasing from 17% to 50%, they said.
"Overall, there was little evidence of burnout in the numbers in coupons below 8%, with seasoned 7.0s (pools seasoned at least 30 months) paying an average of 63 CPR and seasoned 7.5s paying 59 CPR," the analysts said. "Diminished levels of burnout are expected in a record low mortgage rate environment."
Among Ginnie Mae securities the speed-up was similar, as CPR gains at and above the 6.5% coupon level were "nearly identical" to those for conventional MBS, they said. As an example, they pointed to the Ginnie Mae 6.5% coupon, in which "every significant vintage" added about 10 CPR, similar to the increases recorded in the comparable Fannie Mae and Freddie Mac MBS.
Messrs. Westhoff and Kramer welcomed an announcement by Ginnie Mae, an agency of the Department of Housing and Urban Development, that it has adopted a new policy for repurchasing delinquent loans from Ginnie Mae mortgage pools, allowing buyouts only when no payments have been made for three consecutive months.
The new policy will take effect with loans placed in pools with an issue date of Jan. 1, 2003. It will not apply to pools issued before then.
Previously, Ginnie Mae allowed rolling 30-day delinquent repurchases (loans with at least one delinquent payment over four consecutive months), which the analysts said probably represent "the bulk of the buyout product."
The Bear Stearns analysts termed the change "long overdue" and predicted that it will substantially reduce the amount of new Ginnie Mae securities that are susceptible to servicer buyouts.
"The most recent 90+ day delinquency statistic for FHA product from the (Mortgage Bankers Association of America) is 2% vs. total loans past due of over 11%," the analysts said. "However, we believe the change should have been applied retroactively to minimize price tiering effects."
In other prepayment-related news, the UBS Warburg Mortgage Strategist concluded that the impact of loan size on speeds is marginal for most loan sizes, but strong for pools with very small loans (in relative terms) and very strong for pools with very large loans (in relative terms).
The primary reason, the UBS Warburg analysts said, is originator solicitation efforts based on demographic differences.
"Higher loan-size borrowers are likely to be more sophisticated financially," the analysts said. "They are also more likely to be targeted by originators ... This implies that relative loan size determines speeds -originator targeting and demographic differences are always in relation to the mainstream, average borrower."
Specifically, the analysts concluded that the lowest 20% of loan sizes "consistently prepay slowly" and the lowest 10% "prepay very slowly."
The analysts dismissed the possibility that the speed differences might be chiefly related to the fact that bigger loans reduce the relative size of fixed closing costs.
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