Conventional speeds declined around 6%-8% in January versus an expected 3% average. The factors impacting CPRs included a lower number of collection days at 20 from 21, which offset the slight 4.0% increase on average in refinancing activity in December as mortgage rates slipped to an average of 3.95% from 3.99%. 

What was most notable about the report was the absence of Home Affordable Refinance Program (HARP) 2.0 activity and higher coupons appear to be responding favorably to that in early trading. Lenders began accepting applications on Dec. 1 and there was some anticipation this would start filtering into prepayments. 

While HARP 2.0 was generally a no-show for this month, analysts caution that it added to prepayment uncertainty in the coming months. The full impact has generally been projected for spring and into early summer as FNMA's DU will not be updated for the HARP changes until March, while loans with LTV's greater than 125% cannot be placed into pools until June.

Meanwhile, seasonals influenced lower coupon speeds and that should begin to reverse out with the recent decline to new lows in mortgage rates and steady to higher number of collection days in coming months (20 in February and 22 in March). Also affecting near-term speeds is the g-fee increase scheduled for April 1 and announced at the end of December. 

As Barclays Capital analysts pointed out in research, lenders have an incentive to fast track origination pipelines to deliver before the cut-off date and this could temporarily elevate speeds in the next two reports.

Speeds on 30-year GNMAs also slowed more than expected across most of the stack, although 4.5% coupons, which had been projected to slow 1%, actually increased 1%. 

While this report was generally uneventful, the near-term outlook might be particularly worrisome – relative to conventionals – due to the recent spike in the Mortgage Bankers Association's government refinace index.

Nomura Securities analysts explained that the recent rally in mortgage rates as well as lower Federal Housing Administration (FHA) rates versus conventional have led to a much larger increase in refinanceability for borrowers underlying 30-year GNMAs than FNMAs.  Analysts noted that recent voluntary speeds on the 30-year GNMA universe have been around 12% CPR and assuming a turnover rate of 3%, the government refinance index would suggest that voluntary prepays can increase by 4%-6% CPR over the next two to three months, they said.

In addition, if buyouts hold steady, total speeds can increase to around 20%-22% CPR. 

The increase in the government index is also related to conventional-to-FHA refis and not just FHA-to-FHA refinancing, so any refinancing in the former group would impact conventionals and not FHA speeds.  Because of this, Barclays analysts do not expect GNMAs to experience a surprise jump in the near future, but that speed increases will be similar to what conventionals experience. As a result, they expect GNSF 4s to 5s to rise by 2-4 CPR. 

Regarding buyouts, Barclays pointed out in their prepay commentary that Bank of America's delinquency pipeline has been building and they project it will reach the 5% cap within four months.

"Given BofA's large presence (about 30% of GNMAI), a single cleanup can lead to a nearly 10 CPR increase for the entire GNMAI universe," they warned.

Given BofA's balance sheet and capital constraints at the moment, Nomura analysts are less certain that the bank would do a one-time buyout and thus increase its balance sheet (by around $14 billion) in one quarter. Therefore, they think it is a reasonable probability that BofA will buyout just enough to remain below the 5% threshold over the coming months, similar to what GMAC is doing, as it works to shore up its balance sheet.      

eMBS reported overall speeds on FNMA MBS declined to 21.0 CPR from 23.0 CPR, down 8.7%; FHLMC MBS was down 1.6 CPR to 22.7 CPR, while GNMAs slipped 1.8% to 16.0.

Conventional gross issuance totaled $82.4 billion; paydowns were $86.2 billion, resulting in negative net issuance of $3.8 billion. Meanwhile, GNMA net issuance was a positive $8.8 billion on gross issuance of $26.3 billion and $17.5 billion in paydowns.  

Prepayment Outlook

Over the next couple of months, prepayments had been expected to start turning higher with speeds in February seen increasing 3%-4% from January, while March is projected to rise 8%. With January results known, updated near term prepayment outlooks will be out over the next week or so. 

Factors influencing speeds outside of day count include a nearly 17% increase on average in the Refinance Index for January from December as mortgage rates averaged three basis points lower to 3.92%. 

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