Defying typical seasonal declines, agency prepayment speeds were widely varied in December, with many pool speeds actually increasing.
Newly originated Ginnie Mae 8s and 8.5s posted the strongest increases, moving up 16.5% and 18.7%, respectively, while Fannie Mae 1999 8s increased 7%.
"Note that while percentage increases on new production look alarming, the overall magnitude of speed is considerable more benign than levels on comparable Fannie Maes," said Credit Suisse First Boston mortgage researcher John Vibert, noting that Ginnie Mae 8s prepaid at a constant prepayment rate of 4.6% compared with 18.9% for Fannie Maes. Historically, prepayment speeds generally decline by 10% during the month of December.
Ginnie Mae seasoned pools were down across the board, however, with 6s decreasing 16%, 6.5s slowing 10%, 7s falling 4%, and 7.5s falling 7.5%. It was the seasoned Ginnie Mae premiums, though, that marked the greatest decline, with 1993 and 1994 8s declining by 17% to 19%.
"On the premium side, higher coupon Ginnie Maes slowed in line with discount speeds despite the increase in business days and the November rebound in the Mortgage Bankers' refinancing index," said Vibert.
As for Fannie Mae discounts, they remained relatively stable with 6s and 6.5s decreasing 1% and 2%, respectively. Fannie Mae seasoned discounts were mixed, however, as 1993 6s decreased 2.9% while 1995 6.5s showed a 10% rise. "November and December both had unusually large numbers of business days, which explains some of the strength in discount speeds observed both this month and last," Vibert said.
Fannie Mae premiums increased, with 8s remaining relatively unchanged, increasing 1.2%, while 8.5s increased to 32% CPR from 24% CPR in November. Super premiums, those mortgage pools with rates over 9.5%, showed increases between 5% and 8%. However, seasoned Fannie Mae did not follow this trend, as 1995 8s showed a 10% decline, and 1993 7.5s slowed by 6.6%
"The reasons for the different speed change patterns were two fold," explained Warren Xia, vice president and senior analyst for Banc of America Securities. "First, the speed increases were due to the temporary dip in mortgage rates around mid-November. Second, the newly originated mortgages typically respond to refi opportunities faster than the seasoned loans because the loan documentation was relatively new."
Look Out For January
Both Xia and Vibert are predicting speeds for all Fannie Mae and Ginnie Mae pools to show sharp declines over the next few months.
While Xia said that one might conclude that the data would indicate premium speeds picking up, there are two fewer trading days in January than December. He also predicts a decline in discounts even if existing home sales top out at over 5.20 million units. "This is because the seasonal downward trend is simply too strong to overcome," he said.
A typical January decline is about 15%, and Vibert sees premiums falling on par to possibly greater than the average, with new production falling more than seasoned loans. "New production should register much larger declines over the next two months if rates remain at their current levels," he said.
Furthermore, Vibert said that Ginnie Mae premiums will have a dramatic slowdown in the coming months, with double-digit declines expected.
