Speeds on 30-year FNMAs increased about 5% on average versus expectations of slowing in the 5% area in December. Furthermore, the largest percentage increases were in discount coupons, the sector which was previously expected to show the largest percentage declines. The story was the same in FHLMC Golds.
The increase in speeds was partly attributed to the warmer weather in the eastern U.S., which offset the traditional seasonal slowdown, Credit Suisse said. Analysts from the firm noted that speeds were up sharply for the South Atlantic and New England states, versus a muted response in California. They added that broker solicitations contributed to higher speeds, pointing out that prepayments were up sharply on broker-originated pools compared to non-broker counterparts. Merrill Lynch analysts also suggested that the early December jump in refinancing activity could have been pushed into December.
Prepayment speeds on GNMAs were mixed, with 5.5% and 6% coupons more in line with expectations of slowing. The 5% and 6.5% coupons, meanwhile, were slightly higher. Speeds were expected to decline by 2% to 3% for most coupons and vintages.
Paydowns are estimated to have totaled nearly $39 billion, up 9% from November, Credit Suisse analysts said. Estimated fixed rate net issuance was $21.7 billion, they said, up from $18.4 billion in November.
Expectations for January speeds had been to hold little changed from December's levels. The unexpected increase in December, however, has made January's predictions a more challenging event, Lehman Brothers analysts said. Factors influencing speeds include a higher day count -- 21 days versus 20 days in December -- and lower mortgage rates with the 30-year fixed rate averaging 6.14%, down 10 basis points from November's average. However, refinancing activity was slightly lower on average at 1880 versus 1919 due to the holidays. Lehman Brothers analysts said their initial outlook is for speeds to slow 5% to 15% in January on discounts. Credit Suisse predicts speeds will be slightly higher. Meanwhile, JPMorgan Securities analysts anticipate speeds to be flat to down just slightly.