Prepayments of Fannie Mae 30-year discounts declined slightly in November while those of premiums increased mildly, according to prepayment data that was released by the GSE last week. However, prepayments on seasoned premiums, in contrast, mostly declined.
According to prepayment specialist Warren Xia at Banc of America Securities, the aggregate speeds of FNMA 30-year 6s and 6.5s declined by 3% and 4%, respectively, while those of 8s and 8.5s increased by 13% and 5%, respectively.
"The magnitudes of the month-to-month changes for most coupons (8.5% and below) showed few surprises and were very close to what we had predicted," Xia said. "Fannie Mae discount speeds typically decline by 11% between October and November. The slight decline in discount speeds reflected the better day count in November rather than an improved housing market."
Current mortgage rates are about 50 basis points lower than those relevant for November collection, and thus several analysts called the lastest Fannie Mae prepayment report "old news."
"At current rates, 30-year 8s are solidly about 110 basis points in-the-money, and by January, we anticipate a 30% constant prepayment rate (CPR) print on 8s of 1999, and 40% CPR on 8.5s of 1999," said a prepayment analysis written by Rajan Dabholkar of Credit Suisse First Boston. "The big unknown is impact on equity-take-out refinancing, as the economy goes into slower gear."
BofA's Xia noted that Fannie discount speeds will continue their seasonal declining trend in the months ahead, mainly because they are driven by the seasonal home-sales activity, and typically decline by approximately 20% between November and February. With the expected slight slowdown in the existing home sales due to a slower economy, "we expect the speeds to weaken a bit more," he said.
Speeds for premiums might be another matter, Xia added, and could be considered a "wild card."
"The recent steep drop of Fannie Mae 30-day mortgage commitment rates on 30-year conforming mortgage loans to 7.46% and the possibility of moving even lower in the coming week have stirred up the prepayment fear again," he said. "However, the 30-year mortgage commitment rate needs to drop below 7% for a few weeks in order for refinancing in 7s to pick up.
"On a month-to-month basis, we expect Fannie prepayments of discounts to decline by another 5% in December while those of premiums will likely remain little changed.
Meanwhile, PaineWebber chalked up the previous week's aggressive Freddie Mac prepayment response to a reaction to lower rates, as well as the fact that according to FHLMC's refinance statistics, 83% of third quarter refinancings were cash-out refis (new loan balance higher by at least 5%).
"With mortgage rates still dropping, it seems fair to expect higher Refi indicies in coming weeks," PW said.