Recent scrutiny of foreclosure executions related to allegations of procedural flaws could affect some securitization prepayments.

A Credit Suisse report downplayed any immediate broad impact on agency MBS, noting that investors have been largely discounting them but have concerns about the possibly of larger political risk spreading.

The report indicated separate questions that have followed about the validity of securitizations where mortgages were registered electronically could be particularly chilling to the market if they escalate, but its authors said they consider the probability of this occurring is low.

More likely is a slight decline in prepayments that could result if title insurers balk at questions about properties purchased out of foreclosure at one point in the title chain, Credit Suisse researchers said in the report.

The researchers see the impact as affecting voluntary prepayments on loans secured by foreclosed properties but not the involuntary ones as the agencies can buy 120-plus delinquencies out of pools and Ginnie Mae servicers can buy 90-plus day delinquencies out of pool.

They estimated that in the short-term prepayments on about 5% of agency loans from 2008-2010 could slow and prepayments on as much as 10% of GNMAs from this period to slow, based on the higher percentage of purchase loans in the latter.

The report suggested secondary effects of these issues could be further slowing of prepayments and also deceleration of originations if resources become diverted to address them, increasing closing delays.

Prepayment Outlook

In terms of the general outlook for speeds, Sally Ann Runyan from Thomson Reuters reported that the initial prepayment outlook for October on FNMA 30-year MBS is for a 5% increase on average on 4% through 7% coupons. The percentage gains on 5s and 4.5s are projected to rise by 10% to 15%, while 5.5s through 7s range from 4% to flat. Meanwhile, GNMA are seen flat.

Paydowns are currently estimated at around $131 billion. Halfway through October, agency MBS gross issuance is nearing $100 billion.

Based on expected paydowns and issuance, October could see the largest positive net issuance for this year. There have been four months where total issuance exceeded paydowns, with January being the highest at $24 billion.

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