Prepay Speeds on Freddie Mac's MBS Exceed Those of Fannie Mae

Prepayment rates for agency mortgage-backed securities rose substantially in April for new 30-year coupons in the 5.5%-6.5% range, and Freddie Mac speeds were consistently faster than those of Fannie Mae among such coupons.

Among Fannie Maes, speeds for the 2002 vintage 5.5s, 6.0s and 6.5s increased by constant prepayment rates of 9-12 CPR, reaching 20, 50 and 63 CPR, respectively, according to the Bear Stearns Prepayment Commentary. For comparable Freddie Macs, speeds were 3-6 CPR faster.

"We trace this difference to two sources: 1) the heavy concentration of Wells Fargo loans (they tend to prepay faster because of large loan sizes); 2) the shorter refinancing aging ramp associated with ABN Amro pools," analysts Dale Westhoff and Bruce Kramer said.

Noting the return of mortgage rates to near their 40-year lows, the Bear Stearns analysts said they expected about $2.3 trillion of agency fixed-rate pools to be exposed to a refinancing incentive of at least 40 basis points.

"The percentage exposure is not at record levels because so many high-(weighted average coupon) mortgages have been recycled into the mortgage market in the form of new 5.0% and 5.5% pools," they said.

Earlier this year, a 5.60% 30-year mortgage rate would have exposed more than 90% of the fixed-rate market to a hefty refi incentive, but the recycling of high-WAC mortgages has probably reduced that percentage to about 80%, the analysts estimated.

In the March reporting period, agency MBS speeds were higher across the board, although the "focus of the refinancing juggernaut" remained at and below the 6.5% coupons, according to Bear Stearns.

Speeds of new 6% and 6.5% coupons increased by an average rate of 10 CPR, while seasoned coupons above that level recorded speed-ups averaging 5 CPR, Mr. Westhoff and Mr. Kramer reported.

"In most cases, peak speeds for the current report were clocked in the 6.5% coupon," the analysts said. "... The 6.5% coupon is an important line of demarcation in the prepayment landscape for recent (2001 and later) vintages because these pools are backed by borrowers who paid a low-rate premium and carry high average loan sizes."

Some of the biggest increases in speeds in March were found in 2002 vintage Fannie Mae 6.0s, which recorded a 37.1 CPR, the analysts said. Among Ginnie Maes, speeds for 6.0s of the same vintage surged from 22.8 CPR to 34.1 CPR and are still paying "just a few CPR slower" than comparable Fannie Maes, they said.

In other prepayment-related news, Washington Mutual announced that year-to-date sales by its subsidiaries of Fannie Mae 1/4-coupon MBS had exceeded $10 billion.

The 1/4-coupon MBS - which can be denominated in 1/4-percentage-point increments such as 6.25% rather than 1/2-point increments - "more closely aligns the MBS coupon with the rate on the underlying mortgage loans, resulting in greater predictability for prepayment speeds," WaMu said.

Marito Domingo, executive vice president of capital markets in WaMu's Home Loans and Insurance Services Group, termed the greater acceptance of such coupons "a tremendous development" that indicates "the capital markets are ready to evolve toward more efficient MBS execution."

WaMu said the ability to sell MBS in smaller increments also permits "easier management of excess servicing fees and, ultimately, a servicer's mortgage servicing rights."

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