November prepayments were slightly faster than projected, although speeds overall remained fairly benign considering current mortgage rate levels.
For example, speeds were expected to rise around 2% to 3% on average on conventional 30-year mortgages, but were up 5% on FNMAs primarily because of the somewhat faster speeds on 4s through 5s and 6s, while FHLMC Golds increased nearly 7% with faster speeds across the stack.
GNMAs prepaid in line on average. However, 5.5s and 6s increased more than expected at around 10% from expectations of a rise of 2% to 3%. Meanwhile, other coupons offset this rise by prepaying slower than projections.
BNP Paribas analysts attributed the better-than-expected increase in lower coupons partly to fallouts in previous months that finally went through in November as mortgage rates bottomed.
Also evident in this report, Barclays Capital said, was continued use of Home Affordable Refinancing Program (HARP) as a streamlined refinance vehicle with 2008 to 2010 vintages displaying significant tiering.
Specifically in regard to the jump in 4%s, Royal Bank of Scotland (RBS) analysts said that borrowers refinancing from 30-year terms into 15s as the steep yield curve is providing an opportunity for those able to save a substantial amount in lifetime interest with a moderate increase in their monthly payment.
Overall, eMBS reported speeds on FNMA MBS increased 5.8% to 27.2 CPR, while FHLMC Golds were up 7.3% to 30.8 CPR. GNMA speeds were essentially unchanged at 19.4 compared with 19.5 in October.
Gross issuance totaled $127.4 billion against paydowns of $136 billion, leaving net issuance a negative 8.7 billion. Net issuance was negative for FNMA and FHLMC Golds at $17.2 billion, while GNMA was a positive $8.5 billion. Anish Lohokare of BNP specifically noted that the Federal Reserve’s portion of paydowns totaled $31.8 billion
December Prepayment Outlook
Factors influencing December’s activity include one extra collection day in December at 21 versus 20 in November. Meanwhile, 30-year fixed mortgage rates averaged 4.30% in November from 4.23% in October with the Mortgage Bankers Association’s Refinance Index slumping 18% on the higher mortgage rates.
Heading into the November report, speeds in December (reported in January) were projected to increase slightly because of the higher day count, with speeds declining in January by around 10% on a lower day count and more influence from the recent increase in mortgage rates and drop in refinancing activity. Updated prepayment outlooks will be out in the next week or so.
“Tame” is the Word for 2011
The factors stifling prepayments despite historically low mortgage rate levels are expected to remain intact in 2011: capacity constraints, tight credit standards, high transaction costs, and poor home valuations.
JPMorgan Securities analysts noted in their recent outlook that lenders are spending more time scrutinizing applications and gathering the necessary documentation as a result of putback risks, thereby adding to loan costs, while not meaningfully increasing staffing to expedite the process.
It does not make sense even for bankers to add staff “if households still need to pare back on roughly $1 trillion in debt,” Bank of America Merrill Lynch analysts added. So loans will continue to be made to excellent credits, they said, while JPMorgan quantified it saying basically only around one-third of the mortgage universe “can refi free and clear.”
Freddie Mac recently announced it would increase delivery fees beginning in March, which will make it that much more difficult for lower credit quality and high current LTV borrowers to refinance, said BofA Merrill Lynch. They added that while Fannie has yet to make a similar announcement, they think it is only a matter of time. The Federal Housing Administration has also tightened its standards and analysts have projected that both voluntary and involuntary prepayments might decline in 2011.
There is also no relief either expected in home valuations with further declines — albeit slight — projected for the Standard & Poor's/Case Shiller Index. For example, JPMorgan analysts expect prices to decline and bottom in 1H11 with a projected 0.1% increase for all of 2011, while BofA Merrill analysts expect the index to decline 3% for the year. JPMorgan predicted just modest gains of 2.8% to 2.9% for each of the subsequent two years as a result of the ongoing liquidations of distressed properties.
