Slight Acceleration Seen in Prepay Speeds

Prepayment rates on 30-year fixed-rate mortgages in agency mortgage-backed securities increased only a tepid 3% in July, according to Bear Stearns & Co.

Overall speeds on 30-year Fannie Mae collateral stood at a constant prepayment rate of 23 CPR, up only 1 CPR from those recorded in June, while 30-year Freddie Mac collateral prepaid at 21 CPR, said Bear Stearns analyst Steven Bergantino.

Meanwhile, Ginnie Mae speeds actually fell by 1 CPR in July, to 27 CPR.

"The primary cause for the weak July numbers was a two-day drop in the number of business days," Mr. Bergantino said. "The 20-day business calendar in July, compared with 22 days in June and 23 in August, has probably pushed a number of mortgage closings that could have taken place in July into the adjacent months."

Despite the "generally muted response of July prepayments to refinancing opportunities," discount speeds remained at historically high levels, he said.

For example, fully seasoned 5.0% coupons registered an 18 CPR in July, "more than 75% above historical current coupon prepayment rates even after adjusting for seasonal effects on turnover," Mr. Bergantino reported. "Moreover, these elevated discount prepayment rates have persisted in the face of a pronounced flattening in the mortgage yield curve over the last several months."

Mr. Bergantino said the high discount speeds represent "a strong indication of the lasting influence of cash-out refinancings on fixed-rate prepayments."

In contrast to the muted speed-up in July, prepayment rates for fixed-rate MBS collateral rose 17% in the June reporting period. Discount speeds jumped in response to stronger-than-expected turnover and the booming housing market, and lower interest rates spurred premium speeds, according to Bear Stearns.

On 30-year Fannie Mae MBS collateral, speeds increased from a constant prepayment rate of 19 CPR to 22 CPR, while comparable Freddie Mac speeds rose from 17 CPR to 20 CPR, Bear Stearns analyst Dale Westhoff reported.

The biggest speed boost came among 5.5s and 6.0s, which rose more than 4 CPR in June.

These increases "were fairly uniform across most 5.5% coupon cohorts, reflecting the dearth of refinancing opportunities they have witnessed to date and hence the minimal burnout on the seasoned vintages," Mr. Westhoff said. "In contrast, prepays on 2004 6s, which had a refinancing incentive of 64 bps, surged 7 CPR in June versus gains of less than 4 CPR on more seasoned cohorts, which suffer from lower loan sizes and considerably more burnout."

Meanwhile, increases in Ginnie Mae speeds lagged behind those of conventional MBS. Overall prepayments on 30-year Ginnie Maes rose by 2 CPR in June, but at 28 CPR they were still a full 6 CPR higher than for Fannie Maes and 8 CPR higher than for Freddie Macs, Mr. Westhoff reported.

For 15-year Fannie Mae MBS, the speed increases were up only 10% overall, far less than the 17% rise on 30-year Fannies. However, the speed-up in 15-year Freddie Mac prepayments was comparable to that for 30-year collateral, causing speeds to converge with those of their Fannie Mae counterparts, Mr. Westhoff said. This eliminated the 1-2 CPR gap between Fannie and Freddie 15-year speeds that had existed in recent months, he said.

"As for hybrids, they continue to post remarkably high discount speeds, repeatedly advertising the extension protection in this corner of the mortgage universe," the Bear Stearns analyst said.

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