FNMA prepayment speeds slowed a more than expected 16% in August versus an expected decline of 10%.

As expected, however, was that 5%s and 5.5%s would show the most slowing, while higher coupons would see some influence from buyout activity related to the loan modification program.

FNMAs showed more evidence of this than FHLMC Golds. Speeds increased nearly 2% on FNMA 6.5s, while 7s jumped 33% versus a flat expectation for both.  The 6s were mixed with 2007 and 2006s just modestly slower, while speeds on 2005 vintages increased 12%.

FHLMC Gold speeds declined more than FNMAs, down nearly 30% from July. The 5s and 5.5s slowed 30%, while 6s declined over 20% from the previous month. Higher coupons showed less influence from buyouts with speeds on 6.5s and 7s slowing 17% and 5%.

Credit Suisse analysts suggested the larger slowing in speeds for FHLMC Golds is related to the reinstatement of LLPAs on Home Affordable Refinance Program (HARP) refinancings for September delivery pools. They added that this drop could partly reverse in the next prepayment report as Freddie Mac institutes its "open access" refinancings, which allow borrowers to refinance with any Freddie Mac servicer versus only with their existing servicer as was previously required.

It is notable that on the GSE reports, this is the first time since last December that the S-curve has reverted to its normal upward slope, Barclays Capital analysts said, with 6.5s and 7s prepaying faster than 5s through 6s. They expect the S-curve will steepen further in the near future.

GNMA prepayments were in line with expectations. The agency's speeds slowed just 4% overall. The 5.5% and lower coupons slowed modestly, while higher coupons increased, with 7%s prepaying 27% faster from July.

Factors influencing prepayments for August include slower refinancing activity — despite an improvement in mortgage rates, while day count falls to 21 from 22 days. The Mortgage Bankers Association's (MBA) Refinance Index averaged 1933 in July, down 5.7% from June's average, while 30-year fixed mortgage rates averaged 5.22%, according to Freddie Mac's survey. This is down 20 basis points from the previous month"s average.

According to eMBS, FNMA MBS prepaid at 15 CPR, down 3.3 CPR, or 18%, from July, FHMLC Golds prepaid at 13.9 CPR versus 19.3 CPR, down 28%, and GNMAs slipped 2.3 CPR, or 12%, to an average 17.2 CPR. Gross MBS issuance totaled $147 billion, paydowns were $75 billion, leaving net issuance at $72 billion and little changed from July"s net.

Prepayment speeds have been projected to be essentially flat overall for September as mortgage rates were little changed on average in August from July at 5.19%, while the MBA's Refinance Index was just 6% higher.

In general, speeds are expected to be flat to slower overall on lower coupons, while 6.5s and 7s will see increasing buyouts due to loan modifications.

Credit Suisse analysts are  projecting 2006 and 2007 vintage 6.5s and 7s will increase by 7-10 CPR in September, while Barclays Capital predicts a 2 to 4 CPR addition from August's results. Updated projections will be out in the next week or so.

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