As warned, prepayment speeds were faster than expected in August, particularly along 3.5% and 4.0% coupons and moderately seasoned 4.5s.

Speeds in an Thomson Reuters Market sample along FN 2011 and 2010 cohorts increased between 17% and 28% versus a projected 12% to 16%, and by 72% on GN I 3.5s versus an anticipated 32%.

Factors contributing to the higher than predicted speeds is related to the longer time it took for lenders to close, and some of August closings likely included activity from June. The Mortgage Bankers Association's Refi Index averaged over 18% higher in June versus May, while July was up less than 2% from June.

BNP Paribas also said that as July speeds on production coupons were slower than indicated from June's Refi Index suggests it was simply a delay related to fallouts as borrowers waited to lock in the better rates available in July. In addition, August had two more business days available for loan closings at 23 versus 21 in the prior month.

Meanwhile, HARP speeds were in line to slower than expected. August is expected to be the peak response, although speeds are anticipated to hold around current levels into 2013. No doubt the drop in mortgage rates and pickup in refinancing activity among the better credits diverted mortgage banker capacity away from HARP borrowers and this will shift back.

Also there are further tweaks forthcoming based on remarks in early August from FHFA Acting Director ,Edward DeMarco who said that based on feedback from lenders regarding the HARP 2.0 changes, "a few operational adjustments to further simplify this process and increase the number of loans approved for refinancing" had been identified and updated guidance was forthcoming.

Also late last week there was a draft revision made to the Menendez-Boxer bill that removed the clause related to extending the HARP eligibility date to May 31, 2010, but kept intact changes that would increase cross-servicer refis and remove LLPAs, among other items.

Barclays Capital commented that between the FHFA and/or the potential legislation "further streamlining of the HARP program seems very likely," and they warned this could have a material effect on pre-HARP prepayments. In particular, reducing barriers to cross-servicing should lead to a pickup in HARP refis for Bank of America pools.

In GNMAs, 5.0% coupons were faster than predicted with influence coming from the drop in the annual and upfront MIPs for pre-June 2009 borrowers that took effect on June 11 (dubbed FHA HARP).

Meanwhile, speeds on higher coupons were also above expectations and it appears it was related to delinquency buyouts from Bank of America, particularly in 5.5s and 6.0s, and to a smaller extent in 6.5s, while GMAC appears to have been more involved in the latter.

J.P. Morgan said it appears that 2008 6.0s and 6.5s also had some impact from the FHA HARP.

Overall, eMBS reported speeds on FNMA MBS increased 10.9% to 29.6 CPR in August from 26.7; FHLMC was up 11.4% to 30.4 from 27.3, while GNMAs jumped nearly 13% to 22.9 from 20.3. Gross issuance totaled $148.3 billion, while paydowns were $146.8 billion which resulted in net issuance of +$1.4 billion.

Influencing factors for this report included record low 30-year mortgage rates which averaged 3.55% in July, down 13 basis points from June, while the MBA's Refi Index rose 1.8% on average. Day count increased to 23 from 21 days as previously noted.

An updated prepayment outlook will be out in the next week, but one particularly strong influence will continue to be the number of collection days. September drops to 19, while October holds 22. Heading into the August report, speeds for September (reported in early October) on conventional 30s were predicted to decline around 5% to 10% on aggregate.


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