Contrary to previous experience, Freddie Mac MBS are prepaying slower than their Fannie Mae counterparts, which is a phenomenon attributed to differences in Freddie's seller distribution compared to the composition last year.

Over the majority of 2002 and 2003, Gold speeds generally outpaced FNMA securities only to decelerate after the August 2003 rise in prepays. Data shows that this year, the vast majority of Gold cohorts have been prepaying consistently slower compared to same-vintage, same-WAC FNMAs. The only major exceptions cited occurred in the May and June prepayment reports, reflecting a spike in speeds.

Analysts from UBS ran through various possible explanations for the slowdown including the fact that Golds might have more burn out than FNMAs due to comparatively faster Gold speeds seen in 2003, and differing Alt-A concentrations in pools. However, UBS said that the best explanation would be the toning down of servicer retention efforts, which involves soliciting and refinancing loans already found in a servicer's portfolio. This is the only factor, analysts said, that appears to be causing the universal slowing of speeds in Gold MBS. Data presented by UBS showed that FNMA's largest issuers have not decelerated in tune with the rest of the FNMA universe. In contrast, the largest issuers in Golds have decelerated across cohorts.

"The evidence suggests that toned-down servicer retention programs are responsible for recently slower Gold speeds," analysts said, adding that in a major rally where 6s exceeded 50 CPR, this protection should go away. But with borrower languor, analysts said they predict speeds stay muted even with rates rallying 10 to 20 basis points. Therefore, UBS expects Gold speeds to continue prepaying more slowly compared to FNMA equivalents in the next several months.

Another factor that has contributed to much of the Gold deceleration is Freddie Mac announced changes last year addressing the comparatively faster prepays in its pools including the development of contractual incentives/penalties (i.e., higher guarantee fees) that were based on a seller's prepay experience as well as a commitment to return loan characteristics and seller distribution to more typical levels.

Bear Stearns researchers said that along with these changes, servicer behavior drove the slowing trend. Comparing recent prepay experience of Countrywide Home Loans - which is FNMA's biggest seller - pools to those of Wells Fargo - which serves as Freddie Mac's largest seller - the prepayment behavior of each reflects that seen in the agency level. Although Wells Fargo prepaid much faster in 2003, Countrywide is paying much faster today.

As evidence, Freddie Mac's seller distribution has become more diverse compared to 2003 (See chart). This is despite Wells Fargo remaining its dominant seller, comprising 31% of Freddie's total purchases in the third quarter of this year, decreasing from 34% in 2003. However, there have been some significant improvements such as ABN AMRO dropping from 12% to 1% and purchases from Chase Manhattan Bank, National City Mortgage Co. and others have noticeably gone up from 2003 levels, said Bear Stearns

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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