August prepayments increased slightly less than expected at 8% to 9%, versus a consensus forecast of around 10%. While the aggregate number is uneventful, the breakdown is a bit more interesting. For example, speeds on FNMA 4.5% and 5% coupons were predicted to increase 10% to 14%. However, speeds were up just around 5% for 2003 vintage 4.5s and 5s, while moderately seasoned 5s rose 7% to 9% from July. Lehman Brothers analysts believe the slowdown in housing is the primary reason for the smaller than expected increases. They added that their view is that the slower housing put a cap on discount speeds beginning in April, which appears supported by the recent HPI report from the Office of Federal Housing Enterprise Oversight. Based on this, they anticipate that the third quarter HPI report will be even more disconcerting based on the prepayment experience seen in July and August.
Higher coupons were more in line with expectations, though 2005 vintage 5.5s and 6s were faster at up 15%, versus expectations of 10% to 12%.