February conventional prepayments were much faster than expected. Prepayment speeds were projected to increase about 20%, or 4 CPR, but instead were double that: FNMA speeds were 44% higher from January and FHLMC Golds were +52%.     
 
Several factors contributed to the increase: the longer processing time which pushed closings into February that were expected in January (and which contributed to slightly slower than expected speeds in that month), and a pick up in servicer buyouts. 

Lower mortgage rates beginning in December all the way through to January were also a factor. 

In November, mortgage rates averaged 6.09% and by January, were down to a 5.05% average, according to Freddie Mac.  Meanwhile, the Mortgage Banker Association's Refinance Index picked up to an average of 5297 in January from 1897 in November. 

Previously, the largest percentage increases were generally 2008 vintages and in 5s and 5.5s. 

In February, FNMA 5s, 5.5s, 6s and 6.5s speeds all increased in the low to mid-40% area, with 7s surging 84%. 

By vintage, 2007, 2006, and older vintages in our sample increased 49% to 56%, while 2008s rose only 27%.  Despite the sizeable percentage increases, CPRs on 6.5s and 7s remain slower than lower coupons, particularly for FNMAs, as did the more seasoned vintages.

In FHLMC Golds, the largest percentage increases continued to be in 5% and 5.5% coupons — 58% on average — and less in the higher coupons, while by vintage speeds were relatively uniform at about 40% for 2008 through 2006 vintages, while older vintages jumped 66%.   

GNMA speeds were closer in line to expectations — increasing 17% overall for our sample.  Speeds were slower than expected for 5.5% coupons and lower, and slightly higher for 6s and 6.5s.  the 2008 and 2007 vintages changed only slightly from the previous month, while older increases experienced larger increases — particularly seasoned 6s which recorded the highest increases at around 40% to 50%. The 7% coupons were slower. 

According to eMBS, FNMAs prepaid at 22.2 CPR, up 5.8 CPR from January. FHLMC Golds prepaid at 24.5 CPR, up 7.2 CPR, while GNMAs increased just 0.5 CPR to 23.8.

Gross issuance totaled $100.3 billion while paydowns were $105.6 billion, resulting in net issuance of -$5.3 billion. Specifically, FNMA and FHLMC Golds recorded negative net issuance of $18.2 billion, while Ginnie was a positive $12.9 billion.

Speeds have been projected to decline around 5% on average on FNMAs and increase by a like amount on GNMAs, although projections are likely to be revised in the week's ahead. 

For the month of February the Refinance Index averaged 3469, down 34.5% from January's average of 5297.

Although mortgage rates averaged just eight basis points higher to 5.13%, many borrowers were waiting for lower mortgage rates as the government has promoted its goal to move rates below 5% as well as President Obama's Housing Plan. The start of the housing initiative on March 4 is expected to lead to an increase in application activity in the weeks ahead.

Credit Suisse analysts expect some divergence between FHLMC Gold and FNMA 30-year speeds starting in April as a result of the differences in various fees on refinancing under the President's Housing Plan. 

At this time, Freddie Mac has waived a number of these fees, while Fannie Mae has not. 

At the same time, however, Credit Suisse analysts noted that Freddie Mac faces several execution bottlenecks like manual underwriting of loans which could dampen the initial response and defer the full impact until the May prepayment report (released in June). 

If Fannie Mae adjusts its fees in line to Freddie Mac's in the next couple of weeks, analysts said the effect on prepayments could start showing as early as the April report.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.