December Data Shows Little Change in MBS Prepayment Activity

Prepayment rates of Fannie Mae and Freddie Mac mortgage-backed securities were mixed in the December reporting period, after slowing an average of 20% across the board in November.

Analysts Dale Westhoff and Bruce Kramer of the Bear Stearns Prepayment Commentary said changes in December were generally small on a percentage basis, and that nearly all changes in 30-year coupons of 6.5% and higher were under 10%.

Among 30-year 6.5s, all vintages paid at a constant prepayment rate of around 40 CPR, while 7.0s paid in the mid-40 CPR range, they said.

The divergence of new and seasoned vintages increased among Fannie Mae 7.5s and 8.0s, where new issues paid in the mid-50 CPR range and more seasoned issues paid in the 40s.

"The most interesting results were in the cusp coupons [5.0% and 5.5%], where several trends in the current housing market converged to bring the only notable surprises in the December report," the analysts said. "The [Fannie Mae] 5.5%/2003 cohort, which is by far the largest single piece of the coupon stack at $268 billion outstanding, rose from 8.8 CPR in November to 10.6 CPR in December."

The analysts said conventional speeds overall "remain slightly higher" than expected for several reasons, including record levels of housing turnover, high levels of refinanced loans in pools and hybrid adjustable-rate mortgages.

They speculated that the housing turnover levels "may have largely neutralized the November-to-December seasonal factor, which would normally push discount speeds down approximately 8%."

Mr. Westhoff and Mr. Kramer said recent Fannie Mae vintages (2001 and later) above the 6% coupon speeded up in general, while some of the comparable Freddie Mac MBS slowed down.

The analysts attributed the differences to "the situation curing of these rate premium pools, which may be occurring at a different pace between the two agencies."

In the November report, the speeds of Fannie and Freddie MBS fell by an average of 20% across the board, but the Bear Stearns analysts took special note of big declines in the speeds of coupons above 6%.

"Given that this sector is still theoretically refinanceable, there has been considerable uncertainty surrounding the timing and magnitude of the slowdown in this sector," the analysts said. "However, 16 months of continuous, heavy refinancing activity has finally produced a classic burnout response from the remaining borrowers in these pools."

The analysts also pointed to the fact that the speeds of Fannie and Freddie MBS had "fully converged across the coupon stack" after an extended period in which Freddie Mac speeds were markedly faster than those of Fannie Mae MBS.

"The biggest surprise to us in this report is the resiliency of the 2002 vintage 5.5% coupon," they said, noting that it paid at 15 CPR for both Fannie and Freddie MBS in November despite the fact that it had been "out of the refinancing window" for four months.

In the Ginnie Mae sector, the speed declines were not as steep, in part because of servicer buyouts. Mr. Westhoff and Mr. Kramer said another likely reason was the longer processing time for Federal Housing Administration and Department of Veterans Affairs loans with smaller balances.

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