As expected, a lower day count and weaker seasonals contributed to a decline in February prepayments for FNMA securities. The overall slowing was in line with expectations for the more seasoned vintages - especially for 5.5% and 6% coupons. The 5% coupons declined slightly less than anticipated, while 6.5s speeds were almost in line with the expected slowdown of 7% or more.
By contrast, UBS analysts said in a report that the 2006 vintages recorded strong declines - 25% on average. They attributed this to flat or negative home price appreciation that is expected to keep speeds more muted on new production, since the refinance incentive is very limited. In terms of the older vintages, however, with the equity buildup in seasoned vintages, "speeds will remain relatively robust, although slower than what we saw in 2004 and 2005," UBS analysts said.
Meanwhile, FHLMC Gold speeds remained essentially unchanged for the February prepayment report. In January, FHLMC speeds showed mostly larger percentage declines versus FNMAs, suggesting that this could be a correction. GNMA speeds were also stronger than expected. The seasoned vintages were estimated to slow about 5% on average, although speeds on many were unchanged or higher. Specifically, speeds on the 2005 5% vintage increased 13%, or 1 CPR from January. For the January report, speeds had been projected to hold steady, but they slowed about 9%.
Possibly lending support to speeds was the pickup in housing markets, which has halted the decline in home price appreciation-related prepayments, Lehman Brothers analysts said in their prepayment commentary. They noted that the recent home price appreciation reports from the Office of Federal Housing Enterprise Oversight and from Freddie Mac for the fourth quarter showed that many areas of the country - except California - are experiencing signs of improvement. Analysts warned, however, that this could just be a short pause before the housing correction resumes. Also, because California represents a large portion of mortgages outstanding, "the unrelenting deterioration in the California housing condition means that HPA-induced extension risk remains a concern," Lehman analysts said.
Credit Suisse analysts estimated paydowns at $36 billion in a report, which is similar to January's amount. Additionally, they estimated fixed-rate net issuance at $28.6 billion in February, up from $23.1 billion in the previous month. When these are broken down, conventional 30-year issuance was $32.1 billion, GNMAs were $0.9 billion, and 15-year mortgages were negative $4.1 billion.
March prepayment speeds are expected to jump because of a higher day count - 22 in March versus 19 days in February - as well as stronger seasonals and some modest strengthening in refinancing activity. The Mortgage Bankers Association reported a 15% jump in activity for the week ended March 2 in response to the recent flight-to-quality rally. Also, the MBA Refinancing Index averaged 2033 in February compared with 1940 in January.
Credit Suisse projected an increase of 20% to 25% in March, while UBS estimated a rise of more than 30%. Meanwhile, a lower day count is projected to cause some slowing in April prepayment speeds compared with March.
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