January speeds reported last week came out tame January prepayment reports released last Wednesday showed speeds that were generally in-line with previous Street projections.
According to research from Merrill Lynch, FNMA 30s increased by 8% in aggregate on the month from 8.8 CPR to 9.5 CPR. Refinancing activity, according to analysts, was hindered by the short selloff in the middle of December as well as homeowners postponing the application process until after the holiday season.
"This print should be favorable for IOs and up-in-coupon as there were no surprise fast prints, which could have forewarned faster-than-expected prepays in coming months," Merrill analysts wrote.
Although the January report can be seen as tame, researchers said that the real test for prepayments will be when the February report comes out on March 6. According to Merrill analysts, mortgage rates rallied more than 100 basis points in the four weeks from Dec. 26 to Jan. 22, but have since gained back 40 basis points. As a result of the lag in the processing of mortgaging applications, they said that refinancing activity spurred by January's low rates will be reflected in February prepayments. February's report is expected to give the first true indication of how refinancable the mortgage market really is.
Other analysts have speeds surging in February by 61% in FNMAs led by 2007 vintages, estimated to be up 74% on average. The 2006s are expected to average 70% higher, while the remainder of the coupons and vintages are projected to increase 56% from January's levels. GNMAs are predicted to increase about 44% overall, with 2007 and 2006 vintages gaining 63% and 52%, respectively, while other vintages are estimated to be up 37%. In January, the 30-year fixed mortgage rate averaged 5.76% compared to 6.10% in December, while the Refi Index averaged 3838, up 80% from December's average.
March speeds on both FNMAs and GNMAs currently are expected to see further increases of 10% to 20% from the previous month. Despite a significant portion of the mortgage universe considered to be "in the money," speeds are not estimated to reach levels experienced in previous refinance events with similar rate incentives, such as 2004. Barclays Capital analysts predicted that at current mortgage rate levels (a no-point rate of 5.77%), speeds should top out at around 40 CPR compared with 55 CPR experienced in April 2004. If the no-point rate declines to 5.40%, they would anticipate speeds to be similar to early 2004.
Reasons for the muted speeds include tighter underwriting standards by banks and the GSEs in the midst of an environment characterized by a higher leveraged borrower group and weak home prices. The latest Senior Loan Officer Survey shows that banks have tightened further in recent months for prime, nontraditional and subprime residential mortgages. For example, 55% of large bank respondents said they had "tightened somewhat" their standards for prime loans, up from 48% in the October survey. In the nontraditional loan category, 62% had tightened compared to 41% previously, and in subprime, 40% said they had "tightened considerably" compared to 29% in the last report. Demand for all loan types had also weakened notably.
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