Fannie Mae speeds picked up more than expected across 5% through 6.5% coupons in December.
The rise was primarily a response to a higher day count and loan modification buyouts, and to a smaller extent slightly higher refinancing activity.
Speeds increased 26% on average versus a projection for a 20% gain.
It is notable that speeds on 2008-2006 6s increased in the mid-30% area to the mid-to-high 20 CPRs from the low 20s, and same vintage 6.5s jumped close to 50% to the high-20 CPRs from below 20 CPR in November.
Speeds were projected to increase to the mid 20-CPR area. Speeds on 2008-2007 7s rose over 40%, in line with expectations, to the low-30 CPR from the low 20s.
Wells Fargo, Citigroup, and Bank of America, specifically, recorded sizeable month-to-month percentage increases in speeds for 6s through 7s, while Chase increases were modest at most.
Barclays Capital MBS analysts predicted buyouts will pick up over the next couple of months and push 2007 FN 6.5s and 7s to over 35 and 45 CPR, respectively.
Meanwhile, Freddie Mac speeds increased just 15% overall in our sample. Prepayment increases were in line with projections on 5% and 5.5% coupons, while 5.5s through 7s rose just 14% to 15%. Freddie Mac has been slower than Fannie in implementing Home Affordable Modification Program or HAMP, while at the same time, their portfolio has experienced lower delinquencies.
GNMA speeds increased versus expectations of a slowing across 5% through 7s as a result of aggressive servicer buyouts, particularly from Citi and Wells Fargo, in November.
Specifically, 2008-2007 vintage 5.5s, 2008-2005 6s and 2008-2007 6.5s recorded large percentage speed increases, while in 7s the 2006 vintage surged from 41 CPR in November to 69 CPR in December.
Percentage increases on Bank of America pools (5% through 7s in aggregate) were close to 100% or more; Wells Fargo and Chase changed slightly, while Citi dropped substantially.
Overall, the universe of FNMA MBS prepaid at 18.5 CPR in December compared with 14.9 CPR in November, a 24% increase, according to eMBS. Meanwhile, FHLMC Gold MBS increased nearly 16% to 18.2 CPR; and GNMAs prepaid at 26.8, up 16% from the previous month.
Conventional gross issuance totaled $78.5 billion, paydowns $80.2 billion, putting net issuance at negative $1.7 billion. GNMA gross issuance was $38.8 billion, paydowns $20.5 billion, with net issuance at $18.3 billion.
Before this report, prepayments in January and February (reported in February and March, respectively) have been for speeds to be flat to lower overall due to a lower day count — 19 versus 22 days — and a drop in refinancing activity due to higher mortgage rates and the year-end holidays.
Analysts caution, however, that premium coupons may not slow down as much due to HAMP-related buyouts. Updated prepayment outlooks will be forthcoming in the weeks ahead.
In terms of buyouts related to the GSEs' adoption of FAS 166/167, a sudden massive buyout is not expected. BNP Paribas' Anish Lohokare said that a quick buyout of loans "could see considerable turbulence in mortgage prices, which goes against the general theme of market stability."
Barclays Capital added that such an action would also dramatically increase borrowing costs for homeowners which is not a desirable scenario as the Federal Reserve winds down its MBS purchases, the homebuyers tax credit faces an expiration of April 30, and the housing market and economy remain weak.
