The July prepayment reports released last Thursday - reflecting June activity - showed FNMA speeds increasing by a little over 20%, with the highest accelerations coming from 30-year 5s and 5.5s. By contrast, 15-year speeds were quite muted, rising by merely 10%. The comparatively slight rise could be attributed to the flatter yield curve lowering the refinancing incentives for 15-year collateral versus 30-year product.
Although high premium FNMA coupons were up only modestly, current and cuspy coupons were somewhat faster than anticipated, said Art Frank, head of mortgage research at Nomura Securities. For instance, 2004 production 5s were up 32% to 14.8 CPR in June from 11.4 CPR in May. Meanwhile, 2004 production 5.5s prepaid at 21 CPR in June compared to 16.1 CPR in May, a 34% increase. Also, 2004 vintage 6s went up to 31 CPR in June from 23.9 CPR in May, a 36% rise. "It is likely that some people who took advantage of the low rate environment in late May and early June got through by the end of June," said Frank. July speeds are expected to be up significantly to reflect the 2967 Refinancing Index level the week ending June 10, added Frank.
By contrast, speeds on 15-year collateral were comparatively subdued. For example, 2004 5s prepaid at 13.3 CPR in June, up from 12 CPR in May, equivalent to an 11% increase. Meanwhile, 2004 5.5s prepaid at 16 CPR in June, compared to 14.7 CPR in May, a 9% increase. Frank said that, aside from the flatter curve, another factor causing the comparatively slower accelerations in 15s is that these borrowers do not typically refinance into hybrid ARMs, unlike 30-year borrowers. "However, we do expect 15-year product to pick up to a greater extent next month, although 15-year borrowers are a little slower on the refi trigger," said Frank, adding that he expects speeds to be higher across products next month.
Prior to the report's release, the general consensus was for June prepayments to rise. Analysts were generally calling for speeds to increase around 15% overall for FNMAs and 10% for GNMAs. The largest percentage increases were expected to be in 5s, 5.5s, and 2004 vintage 6s. The projected increase was attributed to several factors, including a higher day count as June had 22 business days versus 21 days in May. Declining mortgage rates were also a factor. The 30-year fixed mortgage rate averaged 5.72% in May versus 5.86% in April. By contrast, it averaged 5.58% in June. Furthermore, the Mortgage Bankers Association Refinance Index averaged roughly 2644 in June. By comparison, the Index averaged about 2153 in May, up from 1971 in April.
For July prepayments, the Street generally expects comparatively faster speeds.
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