While the May prepayment report was all about Home Affordable Refinance Program (HARP) refinances, June was about the rate incentive that credit-eligible borrowers had as mortgage rates began setting successive new lows beginning in May.

The low rates gave many borrowers underlying 3.5% and 4.0% coupons a very attractive refinance opportunity. Indeed, the speed on FNMA 30-year 2011 and 2010 vintage 3.5s surged 72% on average and 4.0s by 34% compared to an expectation of 28% and 19%.  

Meanwhile, 4.5% through 5.5% coupons prepaid slower than expected with 5.0s and 5.5s actually declining 1% on average.  It is hard to say yet whether HARP 2.0 speeds have peaked, in part as lenders may have diverted capacity temporarily in response to the jump in refinance activity among the easier to refinance borrowers, while giving HARP loans a longer rate-lock period. Barclays Capital analysts suggested as well that one less collection day may have "mitigated some of the increase."

HARP activity was still evident along FNMA 6.0s and 6.5s which prepaid in line with projections at +2-3% with J.P. Morgan Chase and Citi speeds showing slight increases of around 1-2 CPR on these coupons, while Wells Fargo and Bank of America (BofA) were slightly slower.  

Freddie Mac MBS recorded a similar story with speeds on 30-year 2011 and 2010 vintage 3.5s and 4.0s increasing 54% and 27%, respectively, versus a predicted 15% and 18%. Meanwhile, higher coupon 5.0s through 6.5s slowed around 5% on average. Looking by servicer, JPMorgan Chase and CitiMortgage speeds declined by several CPR along 5.5s through 6.5s; Wells Fargo and BofA were flat to about one CPR higher. 

Speeds on 30-year GNMAs prepaid much faster than projected across coupons and vintages with lower mortgage rates, the drop in the upfront and annual mortgage insurance premium for pre-June 2009 borrowers effective June 11, and BoA delinquency buyouts all factoring in.  To illustrate, speeds on 3.5% 2011 and 2010 vintages prepaid 23% higher on average versus an expected +14% as credit-eligible borrowers took advantage of historical lows in rates; 2009 and 2008 vintage speeds jumped 29% and 37%, respectively, versus a projection of +4% and -1% as eligible borrowers responded to the lower Federal Housing Administration (FHA) fees; and 6.0s and 6.5s surged around 14% versus a prediction of unchanged on expected BoA buyouts.  Speeds on BofA pools jumped to 31.1 CPR in June from 13.8% on 6.0% coupons and to 20.9 CPR from 11.8 on 6.5s.

Overall, eMBS reported speeds on FNMA MBS at 24.4 CPR in June from 23.5, FHLMC at 25.7 from 25.6, and GNMA at 17.4 from 15.7. Gross issuance totaled $134.2 billion, while paydowns were nearly $119.3 billion which resulted in net issuance of +$15.1 billion. Factors influencing prepayments included a 15% increase in refinancing activity on average in May as 30-year fixed rate mortgage rates dropped to an average of 3.80% from 3.91%. Partially offsetting the refi increase was a lower number of collection days at 21 in June from 22 in May.

Heading into today's report, 30-year conventional speeds on average were projected to increase around 5% in July (reported in August) with 2011 and 2010 vintages recording the largest increases again at +10-20% in response to mortgage rate levels, while 2008 and older HARP vintages are expected at 2%-4%. The factors that have made an impact are a nearly 19% jump in refinancing activity in June as mortgage rates plunged to an average of 3.68% from 3.80%, while day count holds unchanged at 21. 

Part of the surge in refinancing activity was related to a jump in FHA applications from pre-June 2009 borrowers which had been seen lifting speeds on 2006-2008 cohorts by over 50% in July.  


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