Speeds on MBS were projected to increase around 5% on average in July. However, speeds were 2% slower on FNMAs, flat on FHLMC Golds, and 1% higher on GNMAs.  

In general, speeds increased much less than expected on moderately seasoned 5% coupons and lower, while 5.5s on up prepaid slower than in the prior month versus a call of more or less flat.

Influencing prepayments was one less collection day at 21 days in July versus 22 in June that largely offset the 5% increase in refinancing activity in June in response to lower mortgage rates.

Tight credit conditions, weak and weakening home valuations, poor appraisals, increased financing costs, capacity constraints at the mortgage bankers and a poor economic and jobs environment all continued to hinder the housing market. Additionally, there are a lower number of eligible borrowers who can refinance through HARP as many already took advantage of this opportunity.  

BNP Paribas also suggested that that the significant rally in the latter part of July caused fall-outs which contributed to slower speeds than anticipated.

Overall, eMBS reported speeds on FNMA MBS rose 1.3% to15.2 CPR, Freddies 4.9% to 14.9 CPR, while GNMAs slowed 1% to 9.5 CPR.  

Gross issuance totaled $63.6 billion; paydowns amounted to $72.3 billion, leaving net issuance at -$8.7 billion. Net issuance for the GSEs was a negative $20.6 billion combined, while Ginnies remained positive at $11.9 billion.

Prepayment Outlook

Looking ahead to the August report, speeds had been expected to peak at around 10% higher than July.  

Factors influencing the report include two additional collection days (23 versus 21), while refinancing activity was flat with mortgage rates little changed on average at 4.55% in July versus 4.51% in June.

Speeds had been predicted to reverse in September as the day count dropped back to 21. However, this appears unlikely at this time given the pickup in refinancing activity on the sharp decline in mortgage rates. An updated outlook will be out next Tuesday.

While call risk has increased on the plunge in yields, analysts expect mortgage rates will have to be closer to or below 4% for speeds to reach similar peaks as 2010.  Last year's record low in mortgage rates was 4.17% based on Freddie Mac's survey, with the MBA Refi Index reaching 5000.

UBS analysts projected a 3.80% rate is needed to get the index to its 2010 high which they think corresponds to a 1.90% 10-year note yield, while Barclays Capital analysts believe rates need to drop to 4.15% and 10-year notes to rally through 2% for refi volume to 5000.

Meanwhile, JPMorgan Securities analysts said that based on the shrinking universe of refinanceable borrowers, even if mortgage rates match last year's lows, the refi index will peak at 4000.  

Finally, Deutsche Bank Securities analysts think that capacity constraints will likely keep the primary mortgage rate from declining through 4% as originators will be flooded with applications to refinance given the sizeable amount of outstanding loans just below 5%.

What all this is telling is that "call risks are contained" and "despite the recent sharp rally in rates, prepayment risk should be well contained," according to JPMorgan and Barclays Capital analysts.

 

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