Last Thursday, the housing agencies released their July prepayment reports, with the FNMA 30-year 5s and 5.5s having prepaid slightly faster than expected, although premiums were in line to marginally slower than Street expectations.

Despite FNMA 5s and 5.5s being marginally faster, speeds on the 6% coupon were a mixed bag depending on the vintage. For instance, 2004 originations prepaid slightly faster, at 34.1 CPR in July, versus 31 CPR in June. On the other hand, the 2003 vintage prepaid slightly slower, decreasing to 31.8 CPR in July from 32.4 CPR the previous month, a 2% decline. Meanwhile, 6.5 and higher coupons, which only comprise a small portion of the current market, came in slower than anticipated, which analysts reported is only mildly surprising.

Prior expectations were for speeds to increase by roughly 5% due to the lower day count - 20 days versus 22 days in June. This was supposed to partially offset the increase in refinancing activity seen in late June and early July with mortgage rates hitting a 14-month low. August speeds, meanwhile, are expected to show similar to slightly higher percentage gains. While refi activity is lower, the day count is higher at 23 days. At this time, there have been some slight downward revisions to August and September speeds mostly in the higher coupons with speeds lowered by 1 to 2 CPR.

With the increase in mortgage rates in recent weeks, the market's refinancing exposure has declined to 25% from 50%, says Bear Stearns in its monthly prepayment outlook. Between the higher rates and the flatter curve, the various borrowing alternatives to use are also much less attractive. As a result, Bear analysts anticipate the Refinance Index will head towards the 1900 level over the next several weeks.

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