The May prepayment report was all about HARP, as was expected; however, speeds on seasoned 5.0%s on through 6.5% were faster than anticipated. Meanwhile, lower coupons were mostly slower than projected.

For example, FNCL 5.0s through 6.5s were estimated to increase between 5% and 9% on average but rose 9-14%, while 4.0s and 4.5s were predicted at +6-7% but were up just 1%.

While day count was a factor (22 versus 20 in April), mortgage lenders are clearly dedicating more capacity to refinancing credit-impaired borrowers following the changes made last year to the HARP program. This was evident as the increase was broad based across servicers, observed Barclays Capital.

BNP Paribas also pointed out that increased payups on MHA paper is a likely influence and they suggested that further strengthening in payups following the break below 1.75% on the 10-year Treasury note "may continue to be the driving force behind HARP."

Freddie Mac results were similar to Fannie Mae's; however, what was of particular interest was the ~$330 million in putbacks from Freddie Mac to Bank of America (BoA) related to an appraisal issue. As expected, less seasoned 5.0s and 5.5s were particularly impacted with BoA 2011 5.0s prepaying at 31.2 CPR from 7.9 in April and 2010 at 29.6 from 18.5. In 5.5s, 2011 was 70.8 from 0.2 and 2010s at 43.1 from 21.6. Similar vintage BoA FNMA 5.0s were flat to +2 CPR and 5.5s were -4 to +2 CPR.

30-year GNMA I speeds were slower than expected. Speeds on 3.5s through 6.5s were anticipated to be flat as modest increases on 5.5s and lower were offset by declines in 6s and 6.5s following BoA delinquency buyouts; however, they declined 10% on average in our sample. It appears that BoA did not engage in any significant buyouts as it had in the previous two months.

Also an influence on the slowing was the pause by pre-June 2009 borrowers as they wait for June 11 when upfront and annual premiums will decline on streamline refis to 0.1% and 55 basis points, respectively, from 1.0% and 1.15% currently.

Overall, eMBS reported speeds on FNMA and FHLMC MBS rose 4.0% and 3.2% respectively to 23.5 and 25.6 CPR, while GNMAs slid 2.8% to 15.7. Gross issuance totaled $119.5 billion, while paydowns were nearly $114.8 billion which resulted in net issuance of +$4.8 billion.

Heading into this month's report, 30-year conventional speeds on average were projected to increase modestly in June (reported in July) with lower coupons rising in response to record low mortgage rate levels, while HARP-able ones were seen holding steady. May was generally thought to be the peak prepay response on HARP, but that may be less certain given servicer response to HARP 2.0 and potentially further participation. Morgan Stanley, for one, said "We do not expect any burnout on HARP anytime soon and see room for other servicers to ramp up."

Other influencing factors include a lower number of collection days at 21 from 22, while refinancing activity in May was 15% higher than April in response to 30-year mortgage rates averaging 3.80% compared to 3.91%. An updated outlook will be out next Tuesday.

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