With the implementation of Freddie Mac's new reporting schedule coming, MBS players are expecting faster speeds with the one-time transition period involving 1.5 months worth of paydowns driving speeds.
Countrywide Securities notes that Freddie Mac's June report would likely manifest more than 150% of the Fannie reports speeds. It added that since the Freddie report is covering two month-ends, Countrywide expects the report to show 160% to 170% of paydowns that would have been reported, provided that the same methodology is used.
"You are not going to have a smooth one-and-a-half months," said Bill Berliner, senior mortgage strategist at Countrywide. " The June report will be picking up two month-ends, and that is when the bulk of payoff activity actually occurs. This pattern of behavior on the consumers' part is something we've observed over many years."
The report stated that most pay-offs occur on the last 3-4 days of the month and the first two days of the month. The cluster of activity within these days is caused by borrowers wanting to "limit their outlay at closing."
According to Art Frank, director of fixed income research at Nomura Securities, the additional eleven days in the reporting period will drive the standard monthly mortality (SMM) on the affected pools up by nearly 50% from what it normally would have been. However, because of the non-linear relationship between SMM and CPR, the additional days would generally drive up CPRs considerably less than 50%.
Frank forecasts that premiums will increase less than 45% in SMMs and CPRs, and for the lower coupons he projects a 45% to 50% increase in SMMs, which would be lower in CPR terms.
The projections are on the slow side because "interest rates bottomed in March," Frank said, "between March 15 to March 23. Mortgage rates went up after that, so refinancing in the period covered in this report should have slowed a bit. So our forecasts are a little bit lower on a per day basis."