MBS Prepayment Speeds Edge up Again

Prepayment rates for 30-year Fannie Mae and Freddie Mac mortgage-backed securities rose modestly in February, according to Bear Stearns & Co.

For Fannie 30-year MBS issues, the aggregate prepayment rate increased by 4.7% in February, compared with an increase of 10% for Freddie Mac issues, Bear Stearns analyst Dale Westhoff reported.

"The biggest surprise in Friday's numbers was that [Fannie Mae] prepayments on premium coupons (6.0s and higher) were virtually unchanged from January levels," Mr. Westhoff said.

He added that the 7% rise in the speeds of Freddie Mac premium coupons was more in line with expectations.

The analyst said the recent rise in the 30-year mortgage rate and the flattening of the yield curve augurs a retreat in the Mortgage Bankers Association's Refinance Index to the 1700 level.

"Barring another rally, we expect the mortgage prepayment curve to flatten as well (beginning with the April report), with discount speeds supported by strong spring/summer seasonal effects while premium speeds compress under a flatter curve and diminished refinancing demand."

The February report was a far cry from January's. Fannie Mae MBS speeds fell significantly across the board in the January reporting period, reaching the lowest level overall in four years, while Freddie Mac MBS speeds declined even more sharply.

The aggregate prepayment rate for 30-year Fannie Mae MBS stood at a constant prepayment rate of 17.0 CPR, down from 21.7 CPR in December, according to Bears, Stearns & Co. The last time such Fannie speeds were recorded at a level below 17 CPR was in January 2001, Mr. Westhoff reported.

Noting that mortgage rates were nearly unchanged from those in December, he attributed the bulk of the prepay decline to seasonal declines in housing turnover and refinancing applications over the Christmas/New Year's holiday season.

"The biggest surprise in this report was the 20+% declines in 6s and 6.5s, as these coupons are still well within the refinancing window," Mr. Westhoff declared. "We attribute some of this decline to the flatter yield curve that has made the hybrid ARM sector a less attractive financing alternative."

While aggregate 30-year Fannie Mae speeds fell 21% in January, comparable Freddie Mac MBS speeds dropped by nearly 30%, the analyst reported. Disparities between Fannie and Freddie MBS speeds stem largely from the higher percentage of Fannie Mae loans with nonstandard borrower characteristics, he said.

In other prepayment-related news, LoanPerformance, a San Francisco-based provider of residential mortgage data and analytics, recently announced the release of version 3.1 of its RiskModel forecasting tool for mortgage defaults, losses, prepayments and delinquencies.

RiskModel 3.1 features new statistical models for alternative-A and prime loans and delivers "dramatic improvement" in performance based on back-tests of over four million loans and over 1,700 securities, the company declared.

Among the enhancements to the tool are the addition of 12-month loan payment history as an optional input, the addition of a new payment shock variable for adjustable-rate mortgages, and explicit modeling of teaser rates and of the impact of housing price appreciation on prepayments.

"Our goal is to predict the future rather than match or 'over-fit' the past," said Ralph DeFranco, the product manager of RiskModel.

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