Ginnie Mae Prepayments Outpace Other Classes of MBS
Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities slowed significantly among 5.5%-6.5% coupons in June, while Ginnie Mae MBS speeds held steady or slowed only moderately.
According to the Bear Stearns Prepayment Commentary, the constant prepayment rates of the new 30-year Fannie Mae 5.5% coupon slowed from 22.3 CPR in May to 17.2 in the June reporting period, a slowdown of 23%.
The comparable figures for the new Fannie 6.0% coupon were 37.7 CPR in May and 29.4 CPR in June, a 22% drop, Bear Stearns analysts Dale Westhoff and Bruce Kramer reported.
The speeds recorded for comparable Freddie Mac MBS showed "slightly larger" declines through the 6.5% coupon. But this pattern did not hold for Ginnie Mae MBS.
"In contrast to conventional speeds that were down 20%-25% in the largest issues, [Ginnie Mae] prepayments for the June reporting period were flat to very modestly slower across the entire coupon stack - well above most expectations," the analysts said.
They attributed the disparities between Fannie/Freddie speeds and Ginnie speeds - which "have almost become the norm in recent years," the analysts said - to several factors.
The factors include the ability of many Ginnie borrowers to qualify for conventional financing, "more aggressive pricing and competition" for subprime loans, expansion by the government-sponsored enterprises into the alternative-A sector, and servicer buyouts, Mr. Westhoff and Mr. Kramer said.
"All else equal, these factors should continue to exert an upward influence [relative to expectations] on [Ginnie Mae] speeds as we enter the next phase of the mortgage cycle," the analysts said.
As for comparisons between Fannie and Freddie coupons, the Bear Stearns analysts said Freddie Mac 30-year MBS (adjusted for weighted average loan age) are registering speeds averaging 1-3 CPR slower than their Fannie Mae counterparts across the board.
"This finding is in sharp contrast to the generally faster speeds evident in many [Freddie Mac] issues through the 2003 refinancing event," Mr. Westhoff and Mr. Kramer observed. Why the change in the Fannie/Freddie equation?
The analysts opined that one factor is Freddie Mac's "lower exposure to the fastest housing turnover states ... This trend is likely to continue given the growing influence of housing turnover as a primary determinant of future mortgage cash flows."
Taking note of the nearly 30-basis-point decline in mortgage rates from mid-June through early July, the analysts said mortgage refinancing exposure had increased by only 10% in that period.
"We expect a fairly localized response to the new incentives centered primarily in the 6.0% and 6.5% coupons [roughly 30% of the MBS market]," they said, noting that mortgage rates had been below 6% for 13 of the past 18 months.
This, they said, is "likely to dampen overall borrower enthusiasm for current rates" in their report.
Meanwhile, in the July issue of "Short-Term Prepayment Estimates," Mr. West-hoff, Mr. Kramer and analyst V.S. Srinivasan examined home price trends at the state level in connection with the Bear Stearns state prepayment database "to uncover the regional trends in housing activity that will influence prepayments for the rest of 2004 and 2005."
They found that California and New England are likely to lead the nation in housing turnover, while certain parts of the South and the Mountain region are expected to lag behind the national average.
"We also show that geography plays a far bigger role than loan size in the determination of discount MBS prepayments," the analysts said. "Investors that neglect to consider the geographic profile of a discount [low loan balance] pool may be disappointed by its performance."
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