The June prepayment report, released today, showed prepayments on FNMA 30-year 5.5s increased to an “eye-popping” 42% CPR, which is a 159% rise from May, said analysts from Credit Suisse First Boston.
The strong refinancing response is because these borrowers, who had average balances of $160,000 to $167,000, were faced with a first-time opportunity to refinance during this reporting period. Recently originated 30-year conventional 5.5s set the prepayment pace for the June report — speeds increased sharply in 2002 and 2003 vintages, said Bear Stearns in a report released this morning.
Bear said that in the conventional 30-year 2003 vintage (with $273 billion outstanding) Fannie 5.5s surged to 20.8 CPR from 7.2 CPR. Meanwhile, the smaller and more seasoned 2002 vintage (with $141 billion outstanding and a WAC nine basis points higher) jumped to 42.4 CPR from 18.6 CPR.
“This was clearly the “sweet spot” of the refinancing pipeline as these borrowers were the easiest and most lucrative to refinance,” Bear wrote. “With a WALA of eight, the jump in 2002 5.5s confirms the shortening of the refinancing aging ramp in the current wave.”
Bear Stearns noted that the 5.0% coupon was unresponsive in this report, going up to 3.8 CPR from 1.3 CPR in May. Analysts said that they expect to see a much larger response emerging in this coupon in next month’s report. Aside from these, Conventional 30-year 6.0s showed considerable gains as well. This was particularly apparent in 2002 vintage FNMA, which increased from to 60.4 CPR to 46.2 CPR.
Analysts said that at and above the 6.5% coupon level, conventional 30-year issues exhibited a muted response in June’s report. Meanwhile, 1998 and later vintages of the 6.5% coupon went up modestly and the 1993 vintage decreased by 3 CPR. In terms of higher up in the coupon stack, most issues were flat to slightly slower.
Bear said that most notable in today’s report is a divergence in the response between lower-coupon (6.0s and lower) and higher coupon (6.5s and higher) issues. The lower coupons, particularly 5.5s, witnessed a significant jump in speeds due to the first-time opportunity to refinance. For 6.5s and higher, the average lagged rate for this report was not sufficient to push speeds considerably higher. Since June’s report corresponds to a mortgage rate of roughly 5.5% and MBA Refi Index results ranging from 7500 to 8000, Bear expects to see additional increases happen in next month’s report as a response to a record low in mortgage rates of 5.25% and a 10,000 peak in the Refi Index. Further, analysts expect more seasoned and higher coupon issues to respond to those rates even though they looked relatively unresponsive in the current report.
Meanwhile, CSFB expects peak prepayments in the July report in most cohorts, flattening in August, while slightly dropping in September. The firm expects to advance to the July report its expectations for August speeds on 30-year 5.5s and 15-year 5s. Slight upward revisions are predicted in 30-year 5s and 15-year 4.5s. JPMorgan Securities expects overall speeds to have a 10% pick up in June with 2002 5.5s accelerating by almost 20% to 25%. Speeds in August should be flat to July while the recent sell-off is probably going to have an impact on September speeds.
In the GNMA sector, speeds in the lower coupons generally kept abreast with their conventional counterparts,, with 5.5s of 2003 rising nearly 13 CPR (20.4 from 7.5), and 2002 5.5s adding nearly 17 CPR (34.4 from 16.8). In the higher coupons (those above the 6.5% coupon), most GNMA speeds were flat to slightly higher.
