Overall, the August prepayment report is viewed as uneventful for the most part since it did not reflect the sharp drop in mortgage rates that occurred beginning in August.
Indeed the primary factors influencing the results were the two extra collection days in the month to 23. Refinancing activity was also essentially flat on average in July compared with June given that mortgage rates were static.
Speeds on conventional 30-year agency MBS were in line with expectations on 5% coupons and lower on average, while higher coupons were faster than expected. Sarah Hu, an MBS analyst with Royal Bank of Scotland, attributed the increase in super premiums to the higher day count with voluntary speeds higher while involuntary prepays remained almost the same over the month.
The largest percentage increases, not surprisingly, were in the less seasoned (2010 and 2009 vintages) 4.0% through 5.0% coupons. The underlying borrowers are of the best credit as the loans were written under the current tight regime. In addition, many had the ability to streamline refinance through the Home Affordable Refinance Program (HARP).
GNMA I speeds were stronger than expected across the coupon stack. BNP Paribas analysts noted that Bank of America speeds increased sharply as did GMAC.
Overall, eMBS reported speeds on FNMA MBS rose 12.1% to17.3 CPR, FHLMC Golds 12.4% to 17.0 CPR, while GNMAs jumped 18.8% to 11.4 CPR.
Gross issuance totaled $77.5 billion; paydowns amounted to $81.6 billion, leaving net issuance at -$4.0 billion. Net issuance for the GSEs was a negative $14.7 billion combined, while Ginnies remained positive at $10.7 billion.
Prepayment Outlook
Speeds are expected to pick up in September as refinancing activity increased as a result of lower mortgage rates.
For the month of August, 30-year fixed mortgage rates averaged 4.26% compared with 4.55% in July, while the Mortgage Bankers Association's Refinance Index averaged 39% higher.
A partially offset to this was a lower day count of 21. Barring any changes or other government interference in spurring refinancings, early estimates suggested that overall speeds will increase between 20% and 35% from August with 4.5% and 5.0% coupons impacted the most.
At this time, speeds are seen peaking in October (reported in November) and below 2010 peaks except for possibly 4.5s and below. An updated outlook will be out next Tuesday.
Market participants will be tuned into tonight's speech from President Obama for any plans that would impact the housing market or refinancing activity.
While nothing detailed is expected, Credit Suisse analysts warned that "policy-related concerns are likely to continue to dominate investor sentiment in the near term."
Expansion of the HARP to include post June-2009 vintages is viewed as an avenue for the government to pursue.
As JPMorgan Securities analysts pointed out, nearly half of the conventional universe is not eligible for HARP currently as the loans were originated from June 2009 to the present.
Barclays Capital analysts, however, think that the likelihood of this occurring is lower than what is being priced into the market. They think that increasing the LTV limit and removing up front delivery fees is a more likely possibility.
This is not viewed as posing a substantial increase to prepayment risk, they said. In addition, analysts said these changes are already priced into the market.
