For the upcoming June report, current prepayment expectations show speeds increasing around 15% to 20% in 30-year FNMAs, and 10% to 15% in GNMAs. The expected jump is due to a higher day count, seasonals, and the increase in the Refinance Index resulting from lower rates.
Meanwhile, July speeds are expected to increase by 5%. The modest increase is due, in part, to a lower day count. August speeds are also expected to rise 10% to 15%. The strong increase is also partly related to day count - 23 days versus 20 days in July.
JPMorgan Securities states that if rates rally another 15 to 20 basis points, the Refinance Index should top 3000. Lehman Brothers, on the other hand, is a bit more aggressive with expectations of the Index breaching 4000 given a similar rate decline. Even if rates drop to March 2004 levels, Lehman analysts believe fixed rate prepayments should be lower versus that period because of the higher burnout level and the flatter yield curve. Lehman also expects a further lowering in overall fixed rate paydown volumes because of a 15 basis point reduction in the MBS universe weighted average coupons.
UBS analysts, on the other hand, said earlier this month that if rates declined to March 2004 levels, they don't expect the Refinance Index to get as high as it was then. This is "because the 2nd or 3rd time borrowers see any given level of rate attractiveness - they are much less apt to refinance," UBS analysts wrote.
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