Conventional Speeds Slow Unexpectedly in September

 Conventional prepayment speeds slowed in September versus expectations of a small increase.  Consensus was looking for a 4% increase; however, speeds declined around 10%.  Factors influencing the September report and hence the bias towards slightly faster speeds were slightly lower average 30-year mortgage rates at 5.19% in August versus 5.22% in July, while the Refi Index averaged 6.4% higher on the month to 2056. Day count was unchanged from August at 21 days.

What was most surprising though was slowing in the premium coupons - particularly 6.5%s and 7%s.  Analysts had been expecting some influence from buyouts related to HAMP to begin to show based on trial modifications started on July 1.  This wasn't the case and is being attributed primarily to a timing issue regarding buyouts.  Barclays Capital, for example, pointed out that implementation of HAMP across servicers has varied dramatically. Chase has been the most aggressive, including in September, by a wide margin versus the other major servicers. They show speeds on FN 30-year 7s at over 35 CPR for Chase issues, with the others (WAMU, BoA, Citi, CW, Wells, and Others) at about 20 CPR or less.

Despite the slower speeds on premiums, Credit Suisse said it doesn't anticipate seeing much change in higher coupon valuations as "the overall outlook for agency buyouts has not changed materially" in their view.  They think investors should fade any significant richening of higher coupons at current levels. Barclays" report also notes that evidence of buyouts was strong in the September report as speeds on high LTV/Low FICO pools remained much higher versus two months ago.  As servicers make progress on their HAMP implantation, they believe buyout-related prepays should trend higher, "adding another 5-6 CPR for the 2006-2007 FNMA 6.5s and 7s over the next couple of months."

While conventional speeds slowed, Ginnie speeds were faster than expected. Our sample projected a small 3% increase in speeds for the month; however, they jumped 14%. Of note, speeds were anticipated to slow on 6s through 7s; however, they increased on 6s and 6.5s, and slowed much less than expected for 7s due to buyouts.  Of interest as well is that GNII speeds were faster than Is. Premium GN IIs recently had rallied sharply and were trading above their GN I counterparts as the collateral was seen as more attractive due to lower WAC and wider diversity.  This report suggests GNIIs aren't immune.

According to eMBS, Fannie Mae MBS prepaid at 13.7 CPR, down 1.3 CPR, or 9%, from August, Freddie Mac prepaid at 12.5 CPR versus 13.9 CPR, down 10%, and Ginnies rose 2.7 CPR, or 15%, to an average 20.2 CPR. Gross MBS issuance totaled $123 billion, paydowns were $72.5 billion, leaving net issuance at $50 billion compared to $72 billion in August.

Looking ahead, prepayment speeds were recently revised upward in response to the rally in mortgage rates that have moved them below 5% with a corresponding move higher in refinancing activity.  For the month of September, the Refi Index averaged 2845, up 38% from August's average as mortgage rates averaged 16 basis points lower to 5.03%.

Speeds have been predicted to increase around 10% in October and close to 5% in November with the largest percentage increases in 5% and 5.5% coupons, and within the higher coupons in 2008-2006 vintages related to HAMP modifications. More seasoned vintages are hampered by higher SATO and longer lag in refinancing, said Barclays, while Citi pointed out that given the "hands-on nature" of refis in the higher coupons, originator attention would likely focus on refinancing "clean" credit 5s and 5.5s, thus limiting prepayments in the premium coupons. Revised outlooks will be forthcoming over the next week.