Conventional speeds slowed less than expected in February, especially on FHLMC Gold 30-years.  FNMA speeds declined nearly 14% from January versus a projected 18%. Speeds declined in line with projections for 5s and newer 5.5s while speeds on more seasoned 5.5s and higher coupons did not slow as much as anticipated. 

FHLMC Gold speeds fell only 8%, half as much as predicted, as speeds across the stack prepaid better than projected. In particular, 2008-2006 6.5% and 7% vintages increased. The lower decline in FHLMC Gold speeds is probably a result of the increase in FHLMC Gold delivery fees that were effective March 1. This was expected to lead to some front loading of loan closings. FNMA could see a similar impact in the next report as its delivery fees are set to increase April 1.

Higher coupons generally were expected to experience less slowing partly as a result of mortgage bankers having more capacity to spare for the harder-to-refinance loans given the recent back up in mortgage rates. Other factors include the longer lag time and less sensitivity to mortgage rates. 

GNMAs were closer in line at an 11% decline on average from January compared with an estimated decline of 13%. Speeds on 2008 and 2009 4.5s actually increased versus an outlook of unchanged to over 20% slower, respectively; less seasoned 5%s also slowed less than projected.

Royal Bank of Scotland analyst Sara Hu suggested that  the increase could be the result of Federal Housing Administration borrowers who are fence-sitters, deciding on whether to obtain a streamline refinancing before the annual mortgage insurance premium increase becomes effective on April 18. 

Higher coupons were actually more in line with expectations, except for 7%s, which showed larger declines than predicted. Delinquency buyouts were tame as most of the major servicers are below the 5% threshold on 90+ day delinquencies.

Influencing prepayments were a lower number of collection days, 19 versus 20 in January, while refinancing activity declined 8.8% in January following a nearly 36% plunge in December as a result of higher mortgage rates.   

Overall, eMBS reported speeds on FNMA MBS declined 21.6% to 15.2 CPR in February, 17% to 17.4 on FHLMC Golds, and 10.4% on GNMAs to 12.0. Gross issuance totaled $99.4 billion; paydowns amounted to $78.0 billion, putting net issuance at $21.4 billion.      

Looking ahead to March, speeds are projected to be slightly faster primarily due to an increase in the number of collection days — 23 from 19 in February.  Refinance activity was lower in February with the Mortgage Bankers Association's Refinance Index declining 8.4% on average from January as 30-year fixed mortgage rates averaged 19 basis points higher to 4.95% according to Freddie Mac's survey. More on the near outlook will be out tomorrow in our weekly prepayment outlook.

The influence of seasonal factors will start to show heading further into spring. However, JPMorgan Securities analysts noted that it will be more muted due to the housing market's weak state.  They said traditionally housing turnover increased about 50% from February to June, which can add as much as 3 to 4 CPR to baseline speeds. Analysts expect, however, turnover to be 30% to 40% lower. This points to a CPR increase of just 2 to 2.5 CPR.   


To see charts on February prepayments and the factors influencing speeds, please see the link below from Thomson Reuters.

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