FNMA prepays registered substantial drops across all coupons and vintages in the October prepayment report, following a faster-than-expected report last month. The October report, which came out Thursday night, was in-line with expectations, said Bear Stearns.
According to Bear, new Fannie Mae 30-year 5.5% and 6.0% coupons slowed by 24% while all higher coupons slowed 10% to 20% (equivalent to seven to 12 CPR). Overall, these numbers are more in-line with the slowing scenario expected in last month’s report, said analysts.
With mortgage rates averaging 6.25% over this period, it is hardly surprising that the largest drops could be found in moderate and fully seasoned 6.0s. In this coupons, declines averaged 10 to 15 CPR. For instance, Bear said that 2001 6.0s slowed to 46 CPR in October from 60 CPR in September. Meanwhile, 6.5s fell close behind with all vintages slowing 10 to12 CPR during the period. In most cases, they dropped to the low-50 CPR range from the mid-60s.
Looking back, it becomes clear that the record refinancing volumes during the peak of the 2003 refinancing wave delayed Bear’s expected slowdown in prepayments by at least one month, especially in seasoned high coupons. Even with the significant declines in October, next month the firm predicts prepayments to register another big drop as the refinancing pipeline continues to dry up and the number of business days goes to 18 in November from 22 in October.
Analysts said that their accuracy rose to 96% for the October report. However, there were still a few surprises. For instance, 2002 FNMA 30-year 7.0s, which have $15 billion outstanding, slightly slowed to 56 CPR in October from 60 CPR in September. Considering the average rate premium of 67 basis points linked to these pools, one reason might be that there are many Alt-A borrowers that populate them. The additional processing time needed for these borrowers may have extended the lag between application and closing.
Bear also found that low coupon speeds (5.0% and 5.5% coupons) are running at slightly higher levels considering the point the market is at in the mortgage rate cycle. This is probably due to a very strong housing market , which is evidenced by record existing home sales as well as housing turnover. Bear’s most recent measure of aggregate housing turnover (existing home sales/housing stock) hit an all-time peak of above 9.0%, which is impressive given that the firm’s database goes back to the mid 1960s.