Ginnie Mae Prepayments Outpace GSE Rates

Speeds slowed across the board in July for Fannie Mae and Freddie Mac mortgage-backed securities, while Ginnie Mae MBS speeds also slowed but remained "significantly faster than comparable conventionals," according to Bear Stearns analyst Dale Westhoff.

Among Fannie Maes, the 2003 vintage 30-year 5.0% and 5.5% coupons slowed by constant prepayment rates of 1.3 CPR and 3 CPR, respectively, while the 6.0% through 7.0% coupons slowed by 7-10 CPR, Mr. Westhoff said.

"We expect minimal market reaction to these numbers given that they are generally in line with market consensus," he said. "Nevertheless, there may be a sigh of relief from higher-coupon pass-through and [interest-only] investors as a substantial slowdown finally takes hold in all of these issues."

As for the gap between Fannie Mae and Freddie Mac speeds, Mr. Westhoff said the slowdowns in July were "nearly identical" for the two agencies' MBS, leaving Freddie Mac speeds "modestly slower" than their Fannie Mae counterparts. This continuing phenomenon "may be linked to geographic/servicer differences," he said.

Among Ginnie Maes, Mr. Westhoff said Bear Stearns believes that "the erosion in the credit performance of FHA/VA loans is adding up to 4 CPR" to baseline Ginnie Mae prepayments, pushing them "well above" comparable Fannie Maes in most issues.

"Contrary to many expectations, today's report has widened the prepayment differential" between Fannies and Ginnies, he said. "Indeed," he added, "we think it is unlikely that [Ginnie Mae] discount/cusp prepayments will ever converge to conventional levels under the current origination regime."

The Ginnie/Fannie differential showed up as 4 CPR among both new and seasoned securities in the 6.0% coupon, as new Ginnies paid at 27 CPR versus 23 CPR for new Fannies, and seasoned Ginnies paid at 30 CPR versus 26 CPR for comparable Fannies, according to Bear Stearns.

The analyst said the overall slowing trend recorded in July is likely to be "temporarily reversed in the August report in response to the 40-basis-point rally in June and July that took the 30-year mortgage rate below 6.0% and increased market refinancing exposure from 18% to 30%."

However, the "sluggish reaction" from the Mortgage Bankers Association's Refinance Index "suggests only a modest and temporary refinancing response that will be centered in the 5.5% and 6.0% coupons," Mr. Westhoff said.

In other prepayment-related news, Standard & Poor's Ratings Services reported that transactions with high combined loan-to-value ratios displayed mixed performance during the second quarter. Speeds increased across all vintages, although by varying degrees, as borrowers "try to take advantage of the current holding pattern" of historically low mortgage rates, S&P said.

Cumulative losses for the issue groups increased by about 34 basis points on a weighted-average basis during the second quarter, the rating agency said. Early delinquencies held "fairly stable," while there was "some improvement" in the seriously delinquent category of 90-plus days, according to S&P.

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