The more interesting story about September prepayments came in GNMAs, where speeds increased more than expected: 8% versus 1%. 2007 vintages were sharply higher in 5.5s, 6s and 6.5s; these surged a respective 80%, 63% and 28% from August's average.
Meanwhile, 5s also increased 10%. On average, 5% coupons were up 24% and 6s 11%.
Speeds on FNMAs and FHLMC Golds were less interesting and closer to expectations, especially as regards to Golds. Speeds were expected to slow about 2% from August, with slightly higher speeds in 2007 vintages and the older vintages slower. FNMAs slowed 6% with 2007 vintages slightly slower on average, while Golds were in line overall. However, 2007 vintages surged nearly 12%, with large gains in 6%s (16%) and 7s (28%) compared with the previous month.
Factors influencing speeds included lower refinancing activity in August, as well as higher mortgage rates. The Refinance Index averaged 1052, down 18% from July's average. At the same time, the 30-year fixed mortgage rate averaged 6.48%, off five basis points from July's average. Day count was the same in September at 21 days. Mortgage rates dropped sharply in early/mid September following the GSE takeover, and this bore some influence on the less seasoned/cuspy vintages in the speed reports. For example, Morgan Stanley analysts noted that the mortgage pipeline has shortened, as the origination pipeline is emptier given tighter underwriting conditions.
Paydowns totaled $35.2 billion, up from $34.7 billion in August, with gross issuance $4 billion higher than its previous $78.7 billion mark. Net issuance, according to eMBS, was $43.5 billion, with GNMAs making up 47.6% of the total versus 41.3% for FNMAs and 11.1% for Golds.
The outlook has speeds significantly higher in October. This comes in response to the drop in mortgage rates in September following the government's bailout of the GSEs and the subsequent increase in refinancing activity.
Mortgage rates averaged 44 basis points lower, dropping to 6.04% in September compared with August's average, while the Refinance Index was up 64% to 1725. The month also has one extra collection day. Analysts have projected October speeds to surge 58% in FNMAs as compared with September, while GNMAs are projected more modestly at an increase of about 21%.
The largest percentage gains are projected in 2007 and 2006 vintages, and in 5.5% through 6.5% coupons. Premium coupon speeds are also expected to be impacted by increased buyout activity from the GSEs. Such activity has been on hold for some time due to the GSEs' capital situation, as well as the consequences of delinquent refinancing through the Federal Housing Administration.
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