Rising Rates Finally Slow Down Prepay Speeds

The speeds of 30-year fixed-rate agency mortgage-backed securities dropped 20% in the September reporting period after rising or holding steady in August.

The slowdown was attributable to higher mortgage rates, fewer business days, and the beginning of the fall slowdown in housing turnover, according to Bear Stearns.

The largest percentage speed declines came in the lower coupons, where 4.5s, 5.0s and 5.5s fell 20%-25%, compared with 10%-12% declines on 6.5s and higher coupons, according to Steven M. Bergantino, managing director of mortgage research at Bear Stearns.

However, discount speeds were still "well above historical norms," he said, citing the example of fully seasoned 5% coupons that prepaid 15 CPR vs. their historical level of 9 CPR.

"Moreover, these elevated discount speeds have persisted in the face of a pronounced flattening in the mortgage yield curve, providing a strong indication of the continued influence of cash-out refinancings on fixed-rate prepayments," the Bear Stearns analyst said.

Speeds on 30-year Fannie Maes averaged 19.4 CPR overall in September, down 4.5 CPR from their August level, while 30-year Freddie Macs recorded average speeds of 17.5 CPR, down 4.7 CPR, Mr. Bergantino reported. Average 30-year Ginnie Mae speeds stood at 25.2 CPR in September, down 4.4 CPR from their August level.

The speeds of 15-year mortgages in agency MBS also fell, but not quite as sharply as 30-year mortgages, recording a 15% decline overall, Bear Stearns reported. Mr. Bergantino noted that discount 15-year mortgages have prepaid well above historical norms, but not to the extent of discount 30-year loans.

This is because the average 15-year borrower has expressly chosen a rapidly amortizing mortgage, and therefore "is somewhat less inclined to undertake the cash-out refinancings that have propelled 30-year prepayments over the past couple of years," he said.

As for the hybrid adjustable-rate mortgage sector, the prepayment slowdown was "generally more subdued" than for 30-year fixed-rate mortgages, even though the average rate of five-year hybrids rose 25 basis points in September, Mr. Bergantino said.

Meanwhile, prepayment rates for private-label subprime MBS registered only small changes in August, according to Friedman Billings Ramsey & Co.

In an Oct. 3 asset-backed securities report titled "Subprime RMBS Performance in August 2005 with a Focus on New Century: Prepayments and Delinquencies," FBR reported that speeds of fixed-rate subprime RMBS that were originated from 2000 to 2005 declined slightly. The speeds of 2000 vintage securities slowed by 2.7%, compared with 6.3% for the 2001 vintage, 8.9% for 2002, 2.5% for 2003, 3.9% for 2004 and 8.2% for 2005.

For adjustable-rate subprime RMBS, changes in prepayment rates were "marginal," FBR reported. Among subprime RMBS originated from 2000 to 2003, speeds declined slightly in August, while the prepayment rates for vintage 2004 securities rose 0.9% and those for vintage 2005 increased 6.3%, according to the research and investment banking firm.

FBR also reported prepayment information by weighted average coupons. The biggest slowdowns came in the 2005 8.0% fixed-rate coupons and the 2003 fixed-rate 6.5s, which recorded speed declines of 57.6% and 47.1%, respectively, according to FBR.

Among subprime ARM securities, speeds were mixed, alternating between increases and decreases from coupon to coupon in the 2003 and 2004 vintages. (For example, in the 2003 RMBS, speeds rose 4.6% for 6.0s, fell 2.9% for 6.5s, rose 1.4% for 7.0s and so on, the FBR numbers indicate.) Among the 2005 vintage securities, prepayment rates slowed only for the 6.0s, while speeding up anywhere from 2.2% to 13.7% for the other coupons.

The authors of the FBR report were analysts Michael D. Youngblood, Jason Hu and Aleksandra Cvijetinovic.

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