Conventional prepayments slowed as expected in December as a result of slightly lower refinancing activity in November. This was partially offset by an increase in the number of collection days to 21 from 20.

Notable was the larger-than-expected slowing in 4.5% and lower coupons, while higher coupons prepaid faster than expected, especially 6.0% and higher. In general, CPRs on less seasoned 4.0% and 4.5% coupons were expected to show the largest percentage declines resulting from seasonal and static day counts associated with the time of year, while higher coupons were projected to be flat to slightly higher because of the longer lag times for processing loans.  BNP Paribas analysts suggested too there was a pickup in delinquency buyouts in higher coupons.

Looking at servicers, Chase and Wells Fargo continued to be the fastest, while Bank of America (BofA) remained the laggard.

Royal Bank of Scotland (RBS) analyst Sarah Hu, however, pointed out that versus November Chase speeds were nearly 3 CPR slower, while BofA prepayments were largely unchanged. 

The Street will be paying close attention to BofA given its press release in December that said it expected to implement the additional Home Affordable Refinance Program (HARP) elements over the next month or so.

"With these enhancements, we expect to significantly increase the number of customers we can help save money on their monthly payments," BofA stated in the release.   

eMBS reported overall speeds on FNMA MBS slipped to 23.0 CPR from 24.8 CPR, down 7.3% and FHLMC Golds were down 5.8% to 24.3 from 25.8 CPR. Fannie Mae net issuance totaled $13.2 billion while Freddie Mac's was -$17.8 billion.

Meanwhile, speeds on GNMA Is in IFR Markets' sample prepaid slightly faster than expected along 6% coupons and lower.  On aggregate, however, speeds on all GNMA Is were essentially flat at 16.3 CPR versus 16.2 in November. Gross issuance totaled $23.9 billion; paydowns were $17.7 billion, leaving net issuance at $6.2 billion.

Prepayment Outlook

Looking ahead to the January report released on Feb. 6, speeds in IFR Markets' sample had been projected to be flat. However, revised outlooks will be forthcoming in the next week or so. 

Impacting CPRs are a decline in the day count to 20 from 21, which will be partially offset by a 4% increase in refinancing activity on average in December from Nov. as 30-year fixed mortgage rates averaged four basis points lower to 3.95%. 

Also, influence from HARP 2.0 is anticipated to start filtering into prepayments since lenders were able to start accepting applications on Dec. 1. The full impact is not anticipated until spring and into summer as FNMA's DU will not be updated for HARP changes until March, while loans with LTVs greater than 125% cannot be place into pools until June.

Barclays Capital analysts believe that prepayment risk related to HARP has increased somewhat based on the recent change Fannie Mae made in its servicer guide that removed the 'borrower ability to pay' clause as an underwriting requirement.

They now expect speed increases related to HARP 2.0 could be at the higher end of their initial estimate of 6-8 CPR for one year speeds for most pre-2008 FNCL cohorts.

Morgan Stanley's MBS analysts said that the removal of this language could be important in making some of the lenders that have not focused on HARP to have the same degree of emphasis on the program as others more comfortable with the new standards.

Meanwhile, the recent drop to a record low 3.91% in mortgage rates is projected to start showing in the March prepayment report, Barclays analysts said, with speeds on 2010 3.5-4.5s potentially hitting a new high.

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