FTN Financial analysts tried to gauge the potential changes to the prepayment landscape as a result of Fannie Mae's and Freddie Mac's streamlined refinancing that have resulted from the government's housing plan.
In a report, analysts attempted to set benchmarks, their analysis considered the refinance period of mid-2002 and mid-2004 and the recent period of January 2007 to present.
To get a better idea about potential future speeds, analysts focused on the 12-36 WALA S-curves for the two periods in terms of LTV, FICO, average loan balance, loan purpose, occupancy type and selected geography.
They said that, during the refinance period, the 80-90 LTV bucket was slower than the lower LTV buckets, while the 90-105 bucket was slower still despite the positive incentive environment.
In the current period, the 80-90 LTV bucket is "less important on a relative basis, and 90-105 still provides significant call protection on a relative basis" and they expect these trends to continue.
They added that 80-90 LTV is the main focus of the streamlined policy, while the 90-105 bucket will have more difficulties related to verifications and so analysts believe this group will likely lag the pickup in the 80-90 LTV group.
Looking at FICO, they said in the refinance period, a FICO of 660 or below prepaid lower than higher FICOs. However, it has shifted to below 720 in the current environment. This is another pattern they think will hold going forward as the focus of the streamline refinancing is to high quality borrowers who have been adversely affected in their LTVs by the decline in home prices.
The third most popular "call protected" factor has been average loan size. In both periods, says FTN, $85k and below has a steeper S-curve than $150,000, while balances in between "hold their relative spots in the loan balance continuum."
It is "the most robust form of call protection, bar none," they said, which is something that cannot be said about LTV or FICO.
In terms of occupancy type, the historical data is only available from the beginning of 2003, but based on the available information, analysts said the data shows that from both the refi and current periods, there is call protection at the borrower level. In other words, investor borrowers tend to be more self- selecting and pay less attention to rate incentives like primary homeowners.
Outside of this, the streamlined program only helps the primary residence. "Therefore, we predict that investor property will continue to be a significant source of call protection going forward," analysts said.
Finally on the geography aspect, during the refinance wave, California and Michigan prepaid above average, while New York, Texas and Florida were slower. In the current environment, all states are slower than the national average, but for different reasons.
Analysts expect Florida to remain slow as there is a large percent of investor owned properties, and NY and TX will stay slow due to state level costs to refinance. They anticipate that the streamlined refinancing policy will likely favor California and Michigan and result in faster than national average speeds this year.
Analysts offered an illustration of a CMO that had what they expect will be "call protected" characteristics going forward. FNR 2006-128 CP, for example, has a weighted average loan size of 61.8k, WALTV of 78.8, weighted average FICO of 697, a percentage in investor owned properties of 26.14%, and an 11% representation in TX (7% in MI).
The CMO yield is 90 basis points higher than a FN 4.5% TBA, 84.5 basis point OAS pickup, and projected TRR assuming a six-month horizon was positive in all seven scenarios with ranges from a low of three basis points for a down steepener environment to 60 basis points in both the up steepener and up 50 basis point shift.