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March Brings Widespread Acceleration of Prepayment Speeds

Prepayment rates for agency mortgage-backed securities surged across the board in March, led by increases of around 50% in the speed of the massive 5.5% 2003 coupons.

Writing in the Bear Stearns Prepayment Commentary, analysts Dale Westhoff and Bruce Kramer said the speed of the new Fannie Mae 5.5s jumped 48%, while the speeds of most Fannie Mae coupons jumped 25%-30%.

For example, 2001 vintage Fannie 5.5s rose from a constant prepayment rate of 27.4 CPR in February to 36.2 CPR in March, and 1999 vintage Fannie 6.0s rose from 35.2 CPR in February to 45.6 CPR.

The report reflects "two important realities in the current prepayment landscape," they said, namely "ample capacity in the mortgage pipeline" and the "significant drop" in mortgage rates after the March 5 employment report.

However, they went on to note the more recent backup in interest rates.

"The sell-off has pushed the mortgage rate back to where it was at the beginning of the year [5.90%], reducing MBS market refinancing exposure from a high of 70% in March to just 37% today," the analysts said. "Similarly, the average borrower refinancing incentive has dropped from a high of 80 basis points the week ending March 12 to just 30 basis points today."

Mr. Westhoff and Mr. Kramer said the interest-only market "may react negatively" to the numbers in the short term "as higher dollar prices and faster speeds once again take their toll on investors for whom the speeds in this report came as a surprise."

However, the prepayment outlook has "substantially improved" for the IO sector in the longer term, they said.

The analysts noted that prepayment rates for Fannie Mae and Freddie Mac MBS have been running nearly even during the current refinancing wave, unlike last year when Freddies prepaid significantly faster than Fannies in major cohorts such as the 5.5% and 6.0% coupons in 2002.

"Indeed, [Freddie Mac] cohorts in these coupons have been generally paying marginally slower than [Fannie Mae's] this winter and spring," they said. "As we pointed out in the past, servicer alliances contributed to prepayment anomalies last year. So far this year, this has not been repeated."

In the Ginnie Mae MBS sector, the '03 vintage 5.5s sped up even faster than the Fannies, surging 55% from 19.3 CPR in February to 30.1 CPR in March. Meanwhile, the Ginnie 6.0s and 6.5s generally rose around 20%, the Bear Stearns analysts said.

The latest numbers "continue to show evidence that servicer buyout activity is pushing speeds faster for selected [Ginnie Mae] cohorts vs. comparable conventionals," they declared, but added that the effect appeared chiefly in the 2003 vintage.

They also noted that demand for agency MBS backed by adjustable-rate mortgages is still running strong.

"ARM originations as a percentage of all agency pools stayed constant at 13% for February and March of this year, down slightly from peak levels in December and January, but close to the average for the last six months of pool issuance," Mr. Westhoff and Mr. Kramer said. "With rates moving higher, we expect the ARM percentage to increase from here."

The Bear Stearns analysis of prepayment trends is published monthly.

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