Fannie/Freddie Speeds Slow Modestly

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities recorded "very modest gains" in August despite the fact that mortgage rates were about 25 basis points lower than in the previous month, according to Bear Stearns.Analyst Dale Westhoff said the speed gains were generally less than 10%, with the bigger percentage increases concentrated in the 5.0%-6.0% coupons. "Above the 6.0% coupon prepayment increases were even more muted, with most increases less than 5%," Mr. Westhoff said. He said the speeds for the August reporting period were slightly below the Bear Stearns projections, and that "most of the incremental refinancing produced by the 50 basis point drop in 30-year mortgage rates in July and August to 5.80% is expected to flow through to the September numbers." Mr. Westhoff cited recent lows in the 10-year Treasury note yield, which he said "narrowly missed reaching our first key rate threshold" of 4.0%. A 10-year Treasury yield below 4.0% would correspond to a 5.60% mortgage rate, he said, and would expose the 5.5% coupon (35% of the mortgage market) to refinancing pressure. Bear Stearns can be found online at http://www.bearstearns.com.