Fannie Mae and Freddie Mac Prepayment Speeds Slow Down in January

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities slowed down in January for most 30-year coupons and vintages, while Ginnie Mae MBS speeds were mixed.

The slowdown in constant prepayment rates averaged 2-3 CPR for most coupons, while the 2002 vintages slowed even less or, in the case of the 5.5% and 6.0% coupons, speeded up slightly, according to the Bear Stearns Prepayment Commentary.

"The numbers show little evidence of burnout in the fully refinanceable conventional coupons, even among the most seasoned vintages," said analysts Dale Westhoff and Bruce Kramer. "For example, January marked the fourth consecutive month that 1998 6.5s have paid above 60 CPR and 2000 7.0s above 70 CPR."

As for Ginnie Mae MBS speeds, most issues held steady or rose somewhat in the January reporting period.

The Bear Stearns analysts said this may represent "the leading edge of a borrower response" to the falloff in mortgage rates in late December, or a reflection of servicer buyouts.

"With delinquencies running at all-time highs in the (Ginnie Mae) sector, we expect servicer buyouts to be a significant factor" in Ginnie Mae prepayments this year, they said.

Messrs. Westhoff and Kramer, joined by analyst V.S. Srinivasan, said in another Bear Stearns publication, Short-Term Prepayment Estimates, that near peak-level prepayment rates are likely to continue into the second quarter, contrary to the conventional wisdom at the beginning of the year.

Pointing to mortgage rates below 6% and an MBA Refinance Index well above 5000, the analysts said they see refinancing activity "dominating" the first half of 2003 if interest rates don't rise significantly.

Commenting on a topic from the annual Bear Stearns Mortgage and Structured Products Conference in January, the analysts opined that there has been "substantial erosion" in the credit quality of the Ginnie Mae borrower universe.

One reason is that Ginnie Mae "has lost about a third of its market share since the early 1990s," falling from 14% to 9% of the one- to four-family debt market, they said, as many Ginnie Mae borrowers refinanced into conventional loans in recent refi waves.

They concluded that the credit erosion "implies additional intrinsic value" in seasoned premium Ginnie Mae MBS.

In other prepayment-related news, Mr. Westhoff predicted that additional MBS pool-level disclosures recently agreed to by Fannie Mae and Freddie Mac "will usher in a new era" of prepayment models with far greater precision.

"For the first time, mortgage investors will have a nearly complete understanding of the risk profile of the loans backing their agency MBS pools," Mr. Westhoff said in a Bear Stearns mortgage research publication, "Agency MBS Disclosure: A New Era Dawns."

As a result, the nonagency sector of the MBS market "will now have a very limited information advantage relative to the agency sector," the analyst said.

The new disclosures were recommended in a joint study by the Department of the Treasury, the Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission as a way of promoting greater transparency and pricing efficiency in the MBS market.

The disclosures include information on the following elements: credit scores, original loan-to-value ratios, loan purpose, property types, occupancy status and servicers.

Shortly after the release of the joint study's recommendations on Feb. 3, both Fannie Mae and Freddie Mac announced that they would provide such disclosures.

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