June prepayments were little changed from May speeds, and were in-line with expectations for the most part. It was noteworthy that FNMA 2003 vintage 4.5s jumped 10%, or 1 CPR, versus an anticipated 2% increase. Analysts at JPMorgan Securities suggested these are borrowers who likely paid points and were more than 150 basis points out-of-the-money in June. The firm's strategic principal trader David Montano also suggests there may have been a larger number of closings than normal on June 30, due to the "effective" four-day weekend associated with the Fourth of July.

The Freddie Mac prepayment report was also fairly uneventful with percentage changes similar to Fannie Mae's. Meanwhile, 2003 4.5s were the one exception with speeds declining by 6%. Overall, however, speeds on FNMAs and FHLMC Gold continue to converge.

Speeds on GNMAs were rather unremarkable, although the 2005 vintage declined 15% versus expectations of 4% slowing. Speeds remain much faster than conventional cohorts.

Bear Stearns's Senior Managing Director Dale Westhoff says the report "supports the soft landing scenario for the housing market." He adds that "the strong discount speeds in this month's report indicate that the housing market is beginning to level out and suggests that the existing home sales report that will be released later this month is likely to show a small up-tick in housing activity."

According to analysts from Credit Suisse, June paydowns totaled $38.9 billion, up slightly from $38.8 billion in May. Analysts report that fixed-rate net issuance increased to $19.9 billion from $14.9 billion with 30-year conventional net issuance at $25.7 billion and 15-year MBS at -$5.7 billion. Ginnie Mae issuance increased to $1.4 billion versus $0.7 billion in May.

Barclays Capital analysts said that conventional accelerations in the most recent prepayment report were mostly in line with their previous expectations. "Overall accelerations were modest across coupons, with speeds on premiums slowing the most," wrote Barclays analysts. They added that the report gives some advance evidence that the refinancing response curve is starting to weaken as a response to higher rates.

Prepayment outlook

The next two prepayment reports will be largely influenced by the number of collection days. In July, the day count is 20 days, down from 22 in June, and in August it pops back up to 23 days. As a result, speeds are seen slowing around 12% to 15% in July, then increasing about 8% to 10% in August.

Specifically, JPMorgan analysts expect speeds to decline in July, (August report) with the seasonal factor typically 2% to 3% lower for July compared to June. Aside from the fewer collection days, analysts noted that the Mortgage Bankers Association Refinancing Index (using five week lags) is down 6%. They also expect that paydowns would be down 10% to 12% to just under $35 billion.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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