Refinancing Remains Vigorous Even in Holiday Season

Prepayment rates rose 5%-7% in December for Fannie Mae mortgage-backed securities and were mixed for Freddie Mac MBS, contrary to some analysts' expectations.

Speeds of 30-year Fannie Mae 6.0%, 6.5% and 7.0% coupons in the 2001 vintage rose by constant prepayment rates of about 3 CPR, and most seasoned Fannie Mae vintages held steady or sped up modestly, said analysts Dale Westhoff and Bruce Kramer of the Bear Stearns Prepayment Commentary.

For Freddie Mac MBS, speeds were "much more muted," the analysts reported. They added, however, that they do not see any "systematic bias" developing between Fannie Mae and Freddie Mac prepayments. The pattern of Ginnie Mae MBS speeds tracked very closely with those of Fannie Mae's.

"The numbers reflect continued vigorous refinancing through the holiday period, with many loans that normally would have closed in November rolling into the December reporting period," the analysts said.

"In retrospect, retailers trying to figure out where consumers were in December probably should have checked the nearest mortgage bank."

The Bear Stearns analysts said they were surprised by the rise in Fannie Mae speeds, attributing it partly to the two additional business days in December (compared with November's total) and the rise and fall of interest rates in October and November.

"We had expected the zigzag rate path to smooth out the prepayment profile, especially since it was occurring during the holiday season when transactions are typically slower to close," the analysts said. "Apparently some of those transactions flowed directly through to the December report."

In the November reporting period, mixed MBS speeds had prompted the Bear Stearns analysts to predict that speeds had peaked and would begin to slow broadly in December.

Speeds of 30-year 6.0% coupons and 2002 vintage 6.5% coupons rose by 5%-10% in November, while those of other coupons either held steady or slowed modestly.

The fastest-paying cohort in November was the 2000 vintage Freddie Mac 7.0% coupon, which peaked in October at 77 CPR and slipped to 73 CPR in November.

The Bear Stearns analysts said the lag time between peak application flow and peak prepayments apparently increased from four weeks to five weeks in the current cycle, a little less than expected.

But they predicted that prepayments may decline more gradually than in the past "as lenders increase their commitment periods to handle the massive application volume."

In other prepayment-related news, the UBS Warburg Mortgage Strategist forecast recently that newly conforming jumbo mortgage loans - those falling within the conforming loan limits for 2003 - should prepay at constant prepayment rates of 5-10 CPR faster than slightly higher loan sizes.

"The fast speeds should generally last for only a few months, however, and are not likely to eclipse speeds on mainstream jumbos, which have loan sizes around $400,000-$500,000," the publication said. "Historically, loan-size buckets $100,000+ above conforming have prepaid at least as fast as newly conforming."

The new limits for single-family loans rose from $300,700 in 2002 to $322,700 in 2003.

The reason for the expected speed-up is that homeowners with loans between those two figures will now be able to refinance into a conforming loan with a lower rate, the analysts said.

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