Prepayment Speeds Fall Less Rapidly than Expected in September

Prepayment rates slowed "far less than expected" for seasoned 6.0%-7.0% agency mortgage-backed securities in the September reporting period, according to the Bear Stearns Prepayment Commentary.

Analysts Dale Westhoff and Bruce Kramer said the latest speeds "suggest that the processing delay between new and seasoned MBS expanded significantly during the final leg of the refinancing wave."

The slowdown in constant prepayment rates for seasoned 6.0%-7.0% coupons ranged from 5% to 20%, the analysts said, compared with a 35%-45% CPR decline for new Fannie Mae 5.5s and 6.0s.

"The contradiction between leading indicators and actual reported speeds indicates that the sharp sell-off in June sparked a massive rush by borrowers to lock in rates in late June and early July, a rush that was even larger than we had anticipated," the analysts said.

They predicted that seasoned high coupons would "play catch-up" to expected speed declines over the next two reports.

The Ginnie Mae sector was affected in much the same way as the conventional 30-year market by the presumed pipeline delays, the analysts said. The slowdown among higher Ginnie Mae coupons were, in percentage terms, "almost identical" to those for Fannie Maes, they said.

They noted, however, that new Ginnie Mae 7.0%-7.5% issues continued to pay about 4.3 CPR faster than comparable Fannie Maes.

"This trend has been in place with almost no exceptions over the past five months of the refinancing wave, and we believe it is caused by servicer buyouts of relatively new FHA-VA loans that have gone delinquent," Messrs. Westhoff and Kramer said.

In another recent publication, Bear Stearns analysts forecast that the mortgage market will enter "a much more stable prepayment environment" after the speed report for the October period.

Writing in the October issue of

Short-Term Prepayment Estimates, analysts Westhoff, Kramer and V. S. Srinivasan noted that the recent rally has caused the 30-year fixed mortgage rate to plunge back below the 6.0% level.

However, they said the "next important rate threshold" is 5.40%, which would move "the massive 5.5% coupon (27% of the 30-year universe) back into the refinancing window."

The analysts, clearly viewing such an event as unlikely, said "there is very little stopping the convergence trend between short-term and long-term speeds over the next two months."

The convergence between the speeds of new and seasoned MBS has been nearly complete, they said.

"Whether an MBS pool has 60% of its original loans still outstanding or 10%, the refinancing response has been nearly identical after controlling for (weighted average coupon) differences," the analysts reported.

But they went on to say that this development may be causing the Street to overestimate speeds on seasoned premiums.

"We have found that the constraints that prevent borrowers from refinancing (credit, equity, income) have the most pronounced influence on prepayment behavior immediately following the refinancing event," the analysts observed. "Given the magnitude of the current refinancing wave, we believe this process of culling borrowers has been extreme."

As a result, MBS of all levels of seasoning are once again likely to represent "excellent value" in the foreseeable future, they predicted.

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