The April prepayment reports on conventionals, which were released May 4, showed last month's prepay speeds were in line with earlier Street expectations. Conventional prepayments were up just slightly for most coupons and vintages. This could be attributed to the two-day decline in day count being offset by stronger seasonals as well as increased refinancing activity in March.
However, it was noteworthy that there were increases for 2006 vintages. The explanation for this might be that mortgage rates were much higher when these loans were originated than they are now at current levels. There is also enough of an incentive for these borrowers to refinance. Specifically, speeds on FNMA 2006 6s were up 11% from last month compared with previous expectations of a 6% increase. In FHLMC Golds, 2006 5s and 6s were up 12% from March.
GNMA speeds were also essentially in line with expectations for most coupons and vintages. Seasoned 6.5s, however, which were projected to rise slightly, dropped roughly 5% from March, which could be attributed to a decline in buyouts.
In a recent report, Barclays Capital analysts noted that the contribution of prepayments from GNMA 6.5s buyouts dropped by 0 to 11 CPR across various cohorts in recent months. In the past months, the level of 90 plus delinquencies has dropped as a result of high buyout levels, Barclays analysts added. Because of this, they expect lower buyouts and moderate speeds going forward for seasoned GNMA 6.5s.
Credit Suisse analysts projected April paydowns at nearly $40 billion, up 3.3% from nearly $37 billion in March. They calculated that fixed-rate net issuance was $23.1 billion, down from $24.4 billion previously. Meanwhile, 15-year net issuance was negative $5.6 billion versus negative $5.2 billion in March.
May prepayment speeds are currently projected to increase about 10% to 12% because of both the higher day count and the additional improvement in seasonals. Some initial Street projections, however, are suggesting that May prepayment speeds might increase 10% or less as a result of the weak housing market and tighter underwriting standards affecting activity. Prepay speeds for the June reports are expected to remain little changed from May, with the day count declining to 21 days from 22.
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