Lower Coupon Conventionals Prepay Faster than Expectations

Speeds on average increased more than expected on 30-year conventionals for the July prepayment report.However, it was a result of faster-than-expected speeds on moderately seasoned 4.5% and lower coupons as borrowers responded to record low mortgage rate levels and lenders to the easier-to-refinance credits. Further gains are expected in August as mortgage rates averaged 13 basis points lower to 3.55% in July with refinancing activity up 1.8%. In addition, the number of collection days rises to 23 in August from 21 in July, which will contribute to further increases in speeds/paydowns. Meanwhile, the higher coupon Home Affordable Refinance Program (HARP)-eligible cohorts were in line with expectations at around 2%-3%. For August, speeds are projected to increase around 4%-5% with the higher day count a significant contributor. In general, HARP refinance activity has been viewed as stabilizing around current levels.However, last week's announcement from the Federal Housing Finance Agency and Freddie Mac indicate additional tweaks are forthcoming to reach more HARP-eligible borrowers. "These factors indicate HARP activity could remain elevated for a longer time than originally anticipated," said Barclays Capital MBS analysts. "As a result, talk of burnout in HARP 2.0 speeds is likely premature." Noteworthy in this report is that barring the GSE buyouts in early 2010, the July report recorded the highest aggregate monthly speeds for 30-year MBS in the post-credit crisis era, said JPMorgan Securities analysts. For example, FNMAs printed at 28 CPR versus 27 CPR in November 2010, 25.2 CPR in November 2011 and 25.8 in March 2012. FHMLC Golds paid at 29.2 CPR in July which was below its November 2010 CPR of 31.3, but faster than November 2011's 26.2 and March 2012's 28.2. GNMA's prepayment experience was likely more surprising as speeds increased much less than expected on certain cohorts impacted by the decline in Federal Housing Administration mortgage insurance premiums for pre-June 2009 borrowers.For example, while speeds on 2009 and 2008 vintage 4.5s were close to expectations, speeds on 2003 through 2007 vintage 5% coupons rose between 11% and 53% versus a predicted surge of between 50% and 150%. Capacity constraints at the mortgage lenders are the most likely reason for speeds falling short of expectations and so further gains for the effected cohorts will likely show in August. The better credit-quality 4.5 cohorts were also likely easier/faster to refi. There were delinquency buyouts from Bank of America, but they appeared to be less than expected in 6.0% and 6.5% coupons and more focused in 5.5s.Specifically, 2009 and 2008 cohorts surged 53% to 31 and 42 CPR versus a projected 35%-40% gain to 28 and 38 CPR. Part of this surge was in BofA, as well as, GMAC pools which suggest delinquency buyouts, but also from Wells Fargo which was likely refis associated with the reduction in mortgage insurance premiums. Overall, eMBS reported speeds on FNMA MBS increased 8.6% to 26.7 CPR in July from 24.4; FHLMC was up 5.9% to 27.3 from 25.7, while GNMAs jumped nearly 14% to 20.3 from 17.5. Gross issuance totaled $128.3 billion, while paydowns were $131.3 billion. This resulted in net issuance of negative $3.1 billion. Influencing factors for this report included record low 30-year mortgage rates which averaged 3.68% in June, down 12 basis points from May, while the Mortgage Bankers Association's Refinance Index surged 18.7% on average. Day count was unchanged at 21 days.An updated prepayment outlook will be out in the next week, but one particularly strong influence in the months ahead will be the number of collection days. After increasing to 23 from 21 in August; September drops to 19, while October holds at 22. Heading into the July report, speeds for August on conventional 30s were projected to increase around 5% CPR on aggregate and decline 10% in September.