Certain Prepay Rates May Inch Up Next Time Around

Some agency mortgage-backed securities speeds seen slowing in the most recent prepayment reports may be bottoming out and could inch up slightly next time around. "We think this is probably the bottom, near term at least" for certain MBS, said Art Frank, director and head of mortgage backed securities research at Deutsche Bank, New York. He said lower 4.5% and 5% MBS coupons might not change but speeds for 5.5% and 6% coupons might be "marginally faster," while speeds for higher coupons could be tougher to predict due to the impact of federal programs. Collectively, Mr. Frank and Wall Street prepayment reports seen at press time indicated aggregate 30-year Freddie prepays slowed about 27%-30% in the most recent month while equivalent Fannie prepays slowed about 17%-19%. Although some slowing had been expected, the extent seen in 5%-5.5% coupons brought them to constant prepayment rates that were lower than projected. Primary market mortgage rates in the period that affected agency MBS speeds in the most recent report were higher than the previous month by 14 basis points and there was one less business day, but "even given that, the declines [in the speeds of 5-5.5% coupons] were bigger than most people expected," Mr. Frank said. Rates expected to affect the next prepayment report have been about 7 bps lower, he said.