Conventional 30-year prepayments increased around 12% versus an expected 6%-7%.
The faster-than-projected experience was across the coupon stack with a variety of factors influencing the results including low mortgage rate levels that spurred activity in lower coupons, while HARP 2.0 changes began to filter into higher ones.
Other influencing factors included the rush by servicers to close loans before the April 1 increase in g-fees as well as spare capacity at mortgage bankers as activity slowed down into the year-end holidays (Thanksgiving through New Year's) and allowed them to focus on the more credit impaired borrowers which take longer to process.
Notable was a pickup in higher-coupon Bank of America-serviced pools indicating better participation in HARP and which is likely to continue based on press releases. Among the large servicers they still remain the laggard, however, noted RBS' Sarah Hu. Meanwhile, Wells and Citi also are ramping up their efforts, while Chase appears to be showing HARP burnout, she added.
Further adding to increased Home Affordable Refinance Program (HARP) presence ahead. last week Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco testified that "many of the largest lenders are seeing tremendous borrower interest and we expect to see an increase in HARP volume in the upcoming reports."
Also at a recent investor conference held by JPMorgan Chase, a key takeaway reported by Nomura Securities was that the HARP 2.0 volume Chase was seeing had exceeded the firm's expectations. Meanwhile, Barclays Capital noted that Chase was seeing increased putbacks for loans with a clean payment history of over 24 months, something that BofA also has reported. As such, analysts believe this should reduce the disincentive for servicers to refi seasoned loans and so "poses a risk for HARP prepayments."
Prior to this report, March speeds had been projected to increase 10%-15% resulting in a near term peak with 2010 FNCL 3.5s through 4.5s predicted to surpass their November highs of 13.5, 24.2 and 24.9 CPR, respectively.
Contributing to this are: a higher day count of 22 days in March versus 20 in February, increased refinancing activity with the Mortgage Bankers Association's Refinance Index up nearly 17% in January from December and another 6% in February as mortgage rates declined from an average of 3.95% in December to 3.89% in February, the continued rush by originators to close loans before the April 1 increase in g-fees, and HARP. An updated outlook will be out next Tuesday.
Speeds on 15-year FNMAs were also faster than expected and recorded a similar trend as 30s with lower coupons increasing the most as higher coupons are seen as being less impacted by HARP.
Prepayment speeds on 30-year Ginnies were generally in line with expectations overall, although lower coupons were somewhat faster while higher coupons were slower indicating limited servicer buyout activity - including from BofA).
Delinquencies have been increasing in BofA-serviced pools and in research earlier this week JPMorgan Securities analysts stated that BofA has delayed buyouts as it was focused on capital issues, year-end financials, and the Federal Reserve's annual stress tests.
With all this passed they think the bank should be able to resume purchases. Using BoA's 2009 buyouts as a guide, they calculate a spike of 15-20 CPR on BofA-serviced pools, assuming buyouts are spread evenly over two months, which translates to a 4-5 CPR increase for the whole cohort.
Given BofA's balance sheet and capital constraints currently, Nomura has previously stated it is less certain that BofA would do a one-time buyout and thus increase its balance sheet. Therefore, they think it is a reasonable probability that they will buyout just enough to remain below the 5% threshold over the coming months, similar to what GMAC is doing, as it works to shore up its balance sheet.
As it is uncertain when this will happen, Barclays analysts suggested that "investors assume the worst when valuing GNMA MBS." In addition to this, GNMAs were thrown another curve (though not unexpectedly) by yesterday's announcement by President Obama regarding streamlined refinancings for loans originated prior to June 1, 2009.
Beginning June 11, the Federal Housing Administration (FHA) will lower its up-front premium to 0.1% and cut the annual fee to 55 basis points for streamlined refis. Currently the FHA charges are 1.0% and 1.15%, respectively.
According to the press release, the White House estimates 2-3 million FHA borrowers will be eligible to benefit with the typical borrower saving around $1,000 per month. As a result, the impact on speeds won't start to show until this summer.
Deutsche Bank Securities analysts are currently projecting one-year speed increases on 4.0% and 4.5% coupons for the eligible 30-year pools to be over 10 CPR and around 3 CPR on 5.5s. This is line as well with Morgan Stanley's expectations of an incremental impact of 8-10 CPR on 4.5s to 1-2 CPR on 5.5s and 6.0s. They think the increased refinancings could add $1 billion in monthly supply. However, the Fed is expected to support the sector.
The near-term outlook for speeds has 30-year GNMAs also increasing in line with conventionals at 10%-15% in March due to the increased number of collection days and pickup in refinancing activity.
Overall, speeds on FNMA MBS jumped 15.2% to 24.2 CPR; FHLMC MBS increased 12.8% to 25.6, while GNMAs rose 9.4% to 17.5, according to eMBS. Conventional gross issuance totaled $86.8 billion; paydowns were $98.4 billion, resulting in negative net issuance of $11.6 billion. Meanwhile, GNMA net issuance was a positive $5.2 billion on gross issuance of $24.5 billion and $19.3 billion in paydowns.
