Speeds Rise Despite Mixed Refinancing Picture

Prepayment rates for 30-year Fannie Mae and Freddie Mac mortgage-backed securities rose slightly in May, spurred by seasonal increases in turnover in the face of mixed refinancing activity, according to Bear Stearns.

Fannie Mae 30-year MBS speeds increased from a constant prepayment rate of 18.7 CPR to 19.2 CPR overall, while comparable Freddie Mac speeds remained nearly unchanged, said Bear Stearns analyst Dale Westhoff.

Speeds of coupons at and below 5.5% rose by 0.5-1.0 CPR, while premium speeds were generally slower, Mr. Westhoff reported. The pattern of prepayments on 15-year MBS collateral was similar.

However, speeds of agency hybrids rose across the board, "reflecting the greater importance of turnover as a source of hybrid prepayments," he said.

Meanwhile, Ginnie Maes saw "larger, more consistent" speed-ups across the coupon stack, resulting in a widening of the Ginnie Mae-conventional prepayment gap, the Bear Stearns analyst reported.

Mr. Westhoff noted that the conforming 30-year mortgage rate had dropped more than 40 basis points from its recent peak of 6.10% in April.

"This has increased the proportion of fixed-rate borrowers facing refinancing opportunities of 40 bps or more from just 21% at the beginning of April to roughly 34% at the current 30-year mortgage rate of 5.68%," he said.

The increase in refi opportunities should spur a 10%-15% increase in June prepayments, Mr. Westhoff predicted.

"Keep in mind, however, that in order to witness a significant increase in the overall level of refinancing activity and in fixed-rate supply, it is necessary to expose the large 5.5% coupon bucket to refinancing opportunities," the Bear Stearns analyst said. "This, in turn, would require that the 30-year mortgage rate fall (and remain) below 5.60%, or equivalently, that the 10-year Treasury rate fall below 3.85%."

Furthermore, to see a jump in refinancing activity that "truly taps into the vast 5.5% coupon bucket" would require a decline of at least an additional 10 bps below the 5.60% mortgage rate threshold, he added.

Meanwhile, in the June issue of Short-Term Prepayment Estimates," Mr. Westhoff and Bear Stearns analysts V. S. Srinivasan and Steven Bergantino cited the continuation of what they termed a near "perfect storm" for the housing market: low fixed mortgage rates, relaxed underwriting standards, innovative low-payment mortgage products and sustained home price increases.

Of these factors, the trio of analysts said "nothing has altered the mortgage landscape more [from a risk/reward perspective] than the combination of unprecedented increases in home values and the growth of new 'affordability' mortgage products."

This has created a situation in which the geographic origin of a loan has become "far more important than most loan attributes," they declared.

They pointed to evidence that California and other regions that have experienced major increases in home prices "prepaid significantly faster than the rest of the country even though there was no commensurate increase in existing home sales."

According to their findings, a loan originated in California today "has a much greater probability of prepayment than an equivalent aged loan originated virtually anywhere else in the country."

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