There were a couple of notable items in the June prepayment report. One was that conventional 4.5%s and 5%s prepaid faster than expected. This was because of a 36% jump in refinancing activity on average over the month, which was attributed to the 21 basis point decline in 30-year mortgage rates to below 5%.

For example, speeds on FHLMC Golds 4.5s and 5s were expected to increase 30% and 20%, respectively. However, these jumped 68% and 39%. FNMAs are a bit harder to interpret as a result of their delinquency buyouts in May on 5s. However, the 2009 vintage was expected to increase 17%, but surged 54% to 14.5 CPR. Meanwhile, overall 5s prepaid on average similarly to FHLMC Golds, and 4.5s were up 93% on average versus an expected over 60%.

The speeds on FNCL 6s through 7s declined between 6% to 7% from May versus an expectation of a slight increase, while FHLMC Golds were essentially flat to higher by 5% versus projections of around 5% to 10% on average. Despite historically attractive mortgage rate levels, premium coupon borrowers remain unable to refinance because of the tight underwriting conditions and underwater mortgages.

JPMorgan Securities analysts said that the capacity constraints at mortgage lenders were a factor in the lack of response to mortgage rate levels as bankers dealt with the easier and faster-to-close loans of prime borrowers. Burnout was mentioned as another likely factor.

Credit Suisse analysts said that they have found risk-based pricing is producing tiering among lender rates. This is why the actual rate available to the borrower is not necessarily as attractive as that reported by the Freddie Mac weekly survey. Analysts also noted that, "employment, documentation, and appraisal challenges make the bar insurmountable for many borrowers, thus dampening the refinanceability of the mortgage universe."

GNMA speeds slowed more than expected, primarily because of the stronger slowing in 6s and 7s as servicer buyouts were muted. However, the latest GNMA delinquency report showed increases in the 30- and 60-day delinquency buckets, which portends a pickup in buyout activity at some point down the road.

Overall, eMBS reported that FNMA MBS prepaid at 17.8 CPR in June, down 34% from May's 27.0 average following their delinquency buyouts. FHLMC Golds rose 18% to 17.4 CPR; and Ginnie Mae came in at 13.2 CPR, virtually unchanged from the previous month.

Gross issuance for all three agencies totaled $92.8 billion, paydowns were $82.9bln, putting net issuance at a positive $9.9 billion. The positive issuance was solely in GNMAs as conventional net issuance remained negative at $10.2 billion, but down from negative $36.5 billion in May.

July prepayment speeds are estimated to increase around 5% to 10%. Factors influencing activity is one less collection day (21 versus 22 in June), and a 16% increase in refinancing activity on average on an 18 basis point drop in mortgage rates.

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