Bad Weather in February Slows Pace of MBS Prepayment Activity

Prepayment rates for agency mortgage-backed securities were mixed in the February reporting period, as speeds rose for 30-year coupons below 6.5%, but generally held steady or slowed for coupons at or above that level.

The 6.0% Fannie Mae and Freddie Mac coupons were "the focus of increased refinancing activity" in the report, rising by constant prepayment rates of about 4 CPR and 7 CPR, respectively, according to the Bear Stearns Prepayment Commentary.

"With 30-year mortgage rates consistently under 6.0% since mid-December, the stage was set for fast speeds in February, but the lid was kept on by a low day count (19 business says in the month) and the weather," said analysts Dale Westhoff and Bruce Kramer. "As a result, speeds went sideways in most issues, except the brand new ones."

The Bear Stearns analysts estimated that 88% of the "mortgage universe" is refinanceable at current mortgage rates.

Citing their prepayment models, they projected "a significant upsurge" in speeds through the early summer months as long as rates stay near current levels.

Messrs. Westhoff and Kramer, along with colleague V.S. Srinivason, also offered further comments on agency MBS disclosure in a recent issue of their Short-Term Prepayment Estimates.

Noting the disclosure recommendations of a joint study by the Department of the Treasury, the Office of Housing Enterprise Oversight, and the Securities and Exchange Commission, the analysts said the information "should result in a better understanding of prepayments in the agency sector."

Fannie Mae and Freddie Mac have agreed to carry out the recommendations, which call for the release of additional data in six categories: credit score, original loan-to-value ratio, loan purpose, property type, occupancy status and servicer information.

Regarding credit scores, the analysts said they do not expect them to be "a significant predictor" of prepayments for agency pools with FICO scores above 660 because borrowers with such scores are generally deemed a prime credit.

"However, for pools with a wide distribution of credit scores, it is more important," they said. "Historically, prepayment modelers have struggled with the concept of breaking a pool into fast and slow payers. The credit score distribution may provide a more natural way of creating these subpools."

On original LTVs, the analysts said even though the effect of a change in LTV has already been incorporated in the Bear Stearns agency prepayment model, the new "absolute LTV" called for in the recommendations should be helpful.

"It is important to note, that although original LTVs are often assumed to be 80% in the agency sector, we find that during a refinancing event original LTVs can drop well below the 80% threshold," they said. "Therefore, the new data will provide a much more accurate starting point for future LTV calculations."

The analysts said the information on loan purpose and property type should also be helpful in estimating prepayments, but that the disclosures on occupancy status and servicers would have little effect.

In other prepayment-related news, Wachovia Securities said in a recent report that prepays on fixed-rate home equity loans hit record highs last year as subprime issuers "drastically" lowered home equity rates.

Aggregate speeds for fixed-rate HELs rose to 34.4 CPR in January, while ARM speeds climbed to 36.3 CPR, the company.

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