Ginnie Mae Speeds Not Slowing as Quickly as Fannie's and Freddie's

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities fell across the board in the October reporting period, but Ginnie Mae MBS speeds "threw the mortgage market a fast curve," according to the Bear Stearns Prepayment Commentary.

Analysts Dale Westhoff and Bruce Kramer said speeds for several lower-coupon Ginnie Mae cohorts defied expectations by slowing less than expected or actually increasing.

Several Ginnie Mae vintages in the 5.0%-6.0% range paid faster in October than in September. For example, the speed of 2002 Ginnie 5.5s accelerated from a constant prepayment rate of 18.2 CPR in September to 21.0 CPR in October, while comparable Fannie Maes slowed from 25.9 CPR to 19.3 CPR, the analysts reported.

"We believe this is another example of servicer buyouts muddying the (Ginnie Mae) prepayment waters," Messrs. Westhoff and Kramer said. "... If the retreat from the high mortgage rates in August gave some cusp borrowers a second chance to refinance, it gave a similar opportunity for large servicers to extract value from their portfolios."

Meanwhile, the biggest slowdowns (more than 10 CPR) among Fannie Mae and Freddie Mac 30-year MBS coupons came in moderate and fully seasoned 6.0s and 6.5s.

"In retrospect, it is clear that the record refinancing volumes reached during the peak of the 2003 refinancing wave delayed our expected slowdown in prepayments by at least one month (particularly in seasoned high coupons)," the Bear Stearns analysts said. "Nevertheless, next month we expect prepayments to register another large decline as the refinancing pipeline continues to drain and the number of business days drops from 22 in October to 18 in November."

In another recent publication, Bear Stearns analysts talked about pipeline lags and why prepayment rates in the September period had been "considerably faster" for seasoned premium coupons than they had forecast.

Writing in the November issue of Short-Term Prepayment Estimates, analysts Westhoff, Kramer, and V. S. Srinivasan rejected the view that the speeds of such coupons would remain fast for the foreseeable future.

They also voiced doubts about two hypotheses on why the speeds have stayed elevated.

One holds that mortgage rates "are artificially low (i.e. lower than the levels indicated in the national surveys) because mortgage brokers and bankers are competing for a shrinking universe of refinanceable borrowers," the analysts said.

The second hypothesis holds that hybrids have gained in popularity as a refinance product, generating faster prepayments from refinancing fixed-rate loans into hybrid loans.

The analysts agreed that hybrids are having an effect on speeds, but said the effect is "a much smaller factor in the agency sector," where they said hybrids accounted for only 7% of issuance in 2003, compared with 20% in the prime non-agency sector.

"We believe a more likely explanation for the speeds in the (September) report is that the lag between the refinancing of new and seasoned loans has expanded during the recent record-setting refinancing wave," they said.

One reason for the lag, they speculated, is that mortgage industry employment hasn't grown as fast as prepayment dollar volume.

"Despite significant technological advances, this latest prepayment event probably created a level of demand greater than the industry was able to meet," they said.

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