Conventional speeds increased less than expected in July, with 30-year FNMAs and FHLMC Golds up 5% to 7% versus an over 15% projection. 

Specifically, speeds increased in line with expectations in 5% coupons — around 20% — as a result of their increased callability, while higher coupon 6s through 7s actually slowed versus a slightly higher projections.

Factors influencing speeds were one less collection day — 21 in July versus 22 in June — while refinancing activity averaged 16% higher in June as mortgage rates averaged 18 basis points lower at 4.71%.

Certainly refinancing activity is muted relative to mortgage rate levels because of tight credit conditions, uncertain job conditions, and capacity constraints at the mortgage bankers.

Meanwhile, GNMA speeds jumped 30% in our sample versus an over 12% projection. Speeds were faster than expected across the stack with 6.5s and 7s in particular up 60% to 50%, respectively, from June. The jump in GNMA speeds was related to delinquency buyouts of Taylor Bean Whitaker loans.

Overall, eMBS reported that FNMA MBS prepaid at 18.8 CPR in July, up 1 CPR from June (over 6%); FHLMC Golds rose 13.2% to 19.7 CPR; and GNMAs jumped 23.1% to 16.4 CPR.

Gross issuance for all three agencies totaled $94.9 billion, paydowns were $92.3 billion, putting net issuance at a positive $2.6 billion. The positive issuance was solely in GNMAs as conventional net issuance remained negative at $16 billion.

August prepayment speeds are estimated to increase around 10% to 15%. Factors influencing activity is an additional collection day — 22 days in August, and a 16% increase in refinancing activity on average on a 15 basis points drop in mortgage rates.

The largest increases will be in the newer 4.5% and 5% vintages, while higher coupons should remain relatively unresponsive.

In terms of net supply, JPMorgan Securities analysts expect it to become increasingly more positive. It could reach as high as $40 billion per month "at the end of the current refi wavelet," analysts said.

At this time, the only way higher coupons are seen being able to refinance is through some government program beyond Home Affordable Refinance Program and Home Affordable Refinance Program.

Although viewed as a remote possibility, higher coupons have gotten hit over the past couple of weeks based on street research discussing options. The talked seemed to have started by a report from Morgan Stanley economists that suggested the economy could receive a significant boost almost immediately and with no impact on the budget deficit "if the Government merely recognized its existing guaranty on the principal value of a large part of the mortgage market —the mortgages that are backed by Fannie, Freddie and Ginnie — and acted to streamline the refi process."

Most analysts, however, believe the odds of such an aggressive program are very low given the hurdles to develop it, the long term costs of the program through such things as higher mortgage rates to borrowers and higher yield requirements for investors because of a new risk beyond interest rates and prepayments to get them to go back into MBS. 

Additionally, there are the short term costs in terms of large losses to investors such as the GSEs and banks.

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