Fannie, Freddie Prepay Speeds Diverge

Prepayment rates for 30-year Fannie Mae mortgage-backed securities rose slightly in December, while 30-year Freddie Mac MBS speeds recorded somewhat larger increases.

For Fannie 30-year MBS issues, the aggregate speed increased by a constant prepayment rate of 0.1 CPR in December, compared with 0.7 CPR for Freddie Mac issues, according to Bear Stearns.

"These small changes in prepayments reflect the stable mortgage rate environment over the last few months," Bear Stearns analyst Dale Westhoff said.

Speed differentials between Fannies and Freddies decreased in the December report. Freddie Mac MBS speeds were still slower than Fannie Mae's on most new cohorts, but "speeds on seasoned cohorts converged," Mr. Westhoff said.

Regarding discount coupons, the analyst said they continue to record historically high speeds and that "one of the few surprises" in the December prepayment report is that they rose from their November levels.

"In a stable interest rate environment we would expect a 15% decline in housing turnover activity from October to December, but given the strong housing market we seem to have countered that trend," Mr. Westhoff said.

Meanwhile, Ginnie Mae speeds held steady or fell modestly in December. Ginnie Mae "continues to pay faster than conventionals across the entire coupon spectrum, with the biggest gap observed in the lowest coupons," the Bear Stearns analyst reported.

Mr. Westhoff also reiterated Bear Stearns' view that these faster speeds probably stem from a variety of factors, including servicer buyouts and the refinancing of fixed-rate mortgages with hybrid ARMs.

As for the November reporting period, Fannie and Freddie 30-year MBS speeds increased modestly, apparently as a result of an uptick in refinancing, according to Mr. Westhoff.

The aggregate prepayment rate for Fannie Mae 30-year MBS was 21.6 CPR in November, up from 20.5 CPR in October, the analyst said.

"The increase was uniformly distributed across the meat of the coupon stack (5s through 6.5s) with no one coupon driving the movement in aggregate prepayments," Mr. Westhoff reported.

He noted that there had been a 6-basis-point decline in mortgage rates from October to November, and a 4.5% increase in application activity as measured by the Mortgage Bankers Association.

Freddie Mac 30-year MBS continued to prepay slower than Fannie Maes in November "across virtually all coupons and vintages," Mr. Westhoff said.

November speeds on 30-year Freddie Mac 5.0% and 5.5% coupons were 1-2 CPR slower than Fannie MBS of the same coupon and vintage, while Freddie coupons of 6.0% and higher were 2-4 CPR slower than comparable Fannies, he reported.

Meanwhile, the overall speed gap between Ginnie Maes and conventional MBS was little changed in November, holding at just above 7 CPR for 30-year collateral vs. Fannie Maes, according to Mr. Westhoff.

As for 15-year collateral, speeds continued to be slower than for comparable 30-year collateral, "highlighting the continued importance of refinancings in driving discount 30-year prepayments," he said.

In other prepayment-related news, Wachovia Securities issued a report analyzing an emerging sector of the asset-backed securities market called alternative-B.

Alt-B securitizations "have credit characteristics better than traditional subprime securitizations but not as good as traditional alt-A securitizations," Wachovia said in the report, titled "Subprime Homesick Blues - A New Look at the Subprime, Alt-B and Alt-A Mortgage Markets."

According to the report, prepayments on alt-B pools are more responsive to changes in interest rates than subprime pools but less so than alt-A pools.

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