Prepayments on 30-year Fannie Mae MBS rose 6% overall and were in-line with consensus expectations of 5% last week. July's lower day count partially offset higher refinancing activity observed in late June through early July as mortgage rates dipped to a 14-month low.
In general, however, 4.5% and 5% coupons, and 2004 vintage 6s prepaid slightly faster than anticipated, while higher coupons prepaid slower. Speed increases were slightly higher on 30-year Freddie Mac 5s and 5.5s versus Fannie Mae, while percentage increases on higher coupons were less. Freddie speeds, however, remain similar to about 2% CPR slower than corresponding Fannie speeds. The strong clip in discount prepayments is related to the ongoing strength in existing home sales, cash-out refinancings, as well as, the lack of lock-in says JPMorgan.
Prepayment speeds on 30-year GNMAs were down around 2% overall versus expectations of a 5% increase. Coupons showing slight increases in speeds were 2003 4.5s and 2004 6s. Speeds continue to run much faster than conventionals.
According to JPMorgan Securities, paydowns totaled $63 billion with net supply up just under $3 billion. They add that agency 30-years outstanding increased $9 billion, while 15-years decreased $6 billion last month. Year-to-date, 30s are up $40 billion, while 15s have lost $36 billion in market share.
The report offers several positives for the mortgage market. Reinvestment of paydowns should be positive for the basis, suggest CSFB analysts, while discounts will benefit from continued fast speeds and premiums from burnout which is limiting speed increases. The report, however, highlights the reactivity of 5% and 5.5% coupons, report JPMorgan analysts, and "implies that fundamentally, 30-year 4.5s and 6s offer significant advantages over 5s and 5.5s from both a prepayment and supply standpoint." JPMorgan analysts currently favor a wide barbell of 4.5s and 6s. The benefits of the trade are gaining convexity, as researchers expect the 4.5 or 6 roll has greater richening potential versus the 5 or 5.5 roll.
Looking ahead to August, current consensus expectations are for speeds to increase around 10%. Looking further out, Bear Stearns analysts projects that by October, prepayments on 5s, 5.5s and 6s will slow to the low teens, mid teens, and low 20 CPR, respectively, given the move higher in rates and a flattening curve, which has reduced the attractiveness of alternative loan programs. Bear analysts add that refi exposure is currently down to 22% from nearly 50% in early July. In 4.5% coupons, Lehman expects fast prints for the next couple of months, given the strong housing market.
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