Lower coupon Fannie Mae mortgage-backed securities prepayments came in higher than expected, according to Wall Street research reports on the monthly numbers.
Credit Suisse said in a report that there was a “modest upside surprise” in Fannie 3.5s. A Barclays report also noted an increase in 3.5-4.5 coupons.
Barclays attributed the move to a 13 basis point decline in the driving rate and the month’s two additional processing days.
One factor that could affect prepayments going forward is whether the federal officials decide to embark on another round of easing involving mortgage-backed securities purchases.
Weak overall U.S. job numbers and a
Barclays said in a global economics report Friday that while the decision has been a difficult one for the Fed to make, the jobs numbers have likely tipped the scales. Barclays’ researchers expect the meeting to produce an open-ended QE that involves purchases of both MBS and Treasuries.
However, some dissenters believe that although an MBS-related QE effort would be politically attractive in that it is viewed as supportive of housing, other factors argue against it.
With domestic and European fiscal risks still looming, Fed officials are more likely to stick to simply extending their current commitment to hold rates late through 2013, according one of the economists who contributed to a Deutsche Bank report on the topic.
Chief international economist Torsten Slok, in a view he said was contrary to consensus, indicated that Deutsche Bank researchers expect federal officials will likely refrain from implementing another round of QE because they “want to keep some powder dry if things really deteriorate later on.”
The Deutsche Bank report also suggests that there are cost-benefit considerations that may come into play in decisions related to whether or not implement another QE program through either another round of outright MBS and/or Treasury purchases, or an alternative in which it exchanges Treasuries for MBS.
While the former moves would put relatively more balance sheet stress on the Fed and the latter move less, the extent to which the latter would help lower mortgage rates would be more muddled, Slok said. In the case of the latter, MBS purchases that put downward pressure on rates would likely be offset to some extent by the Treasury exchanges, which could put upward pressure on rates.
