Prepayment speeds were projected to increase 10%-15% on average in response to a higher number of collection days at 22 from 20; a pickup in refinancing activity in response to record low mortgage rates, and a rush by servicers to close conventional loans before a 10-basis-point increase in the guaranty fee went into effect on April 1.

It appears, however, that most of the latter effect occurred in February, which recorded a faster-than-expected increase in speeds.

Specifically, speeds on 30-year FNMAs rose much less than expected at 7%, with all coupons below expectations. The 15-year FNMAs showed a similar trend, increasing just 3% versus an 11% prediction.

Meanwhile, 30-year FHLMC Golds were closer to expectations at a 9% increase on average as speeds on 5.5s through 6.5s were more in line with projections. Speeds on >125 LTV cohorts for 30-year FHLMC 5.5s rose 9 CPR to 29 CPR compared to less than 5 CPR for LTVs < 125, noted Royal Bank of Scotland analyst  Sarah Hu.

HARP 2.0's influence remained minimal overall. Heading into this report, there were concerns that speeds on HARP-eligible pools could be higher than expected. Credit Suisse analysts, for example, had cautioned that there was anecdotal evidence suggesting short closing timelines for HARP borrowers and increased solicitation of 125+ LTV borrowers.

In addition, the GSEs' automated underwriting systems were upgraded in March for the November changes. In a speech to the Boston Security Analysts Society earlier in the week, Federal Housing Finance Agency Acting Director Edward DeMarco stated "Early market indications regarding the changes to [Home Affordable Refinance Program (HARP)] are quite encouraging. This is one of the most promising tools we have to assist underwater homeowners."

In a February testimony before Congress, DeMarco had said that "many of the largest lenders are seeing tremendous borrower interest and we expect to see an increase in HARP volume in the upcoming reports."

Barclays Capital analysts said that in the three months reflecting the HARP 2.0 changes, they believe some trends were emerging: lumpiness in speeds due to timing differences across servicers in implementing HARP 2.0. They also believe that better-credit borrowers continue to benefit the most versus the more impaired ones. They do expect higher coupon speeds to continue to rise slowly and not be fully ramped up until the June report (released in July) at the earliest.

One factor that will likely continue to inhibit credit-impaired borrowers' ability to refinance is the limited cross servicer participation. While the changes made to the HARP program allow for streamlined refis, they still face hurdles and risks not faced by same servicer ones such as overlays for correspondent lending that restrict the eligible universe or have tighter underwriting restrictions. For example, correspondent lenders for Wells Fargo are limited to a 105 LTV cap on HARP 2.0 refinancings.

GNMA speeds also were slower than expected along 30-year 3.5s through 5.5s. However, they surged on 6s and 6.5s as a result of delinquency buyouts from Bank of America (BofA). Contributing to the slowing were recent reductions in the upfront and annual mortgage insurance premiums for borrowers underlying loans that closed before June 1, 2009 that will be effective June 11.

As a result, slower speeds are anticipated through May and then to begin increasing in June. Amherst has predicted speeds on 4s and 4.5s originated in 2008 and the first half of 2009 could jump 10-15 CPR and by around 6 CPR for 5s.

Overall, speeds on FNMA MBS rose 0.8% to 25.0 CPR; FHLMC MBS increased 1.3% to 26.9, while GNMAs rose 2.3% to 19.8, according to eMBS. Gross issuance totaled $48.2 billion, while paydowns were $125 billion which resulted in net issuance of $23.2 billion.

The increase is primarily due to a surge in Fannie Mae supply of $83.9 billion and in net issuance of $22 billion. Looking ahead, speeds on average are currently seen slowing around 5% in April as the day count declines to 20 days from 22, while refinancing activity declined on average 16% in March from February as mortgage rates rose to an average 3.97% from 3.89%. Barclays analysts expects that lower coupon conventionals likely reached a peak in this report for these reasons and therefore should decline, while HARP-eligible coupons are likely to continue to rise.

Meanwhile, GNMAs might see some influence on speeds for loans closed after June 1, 2009 as these borrowers face an increase in the upfront and annual insurance premium effective for cases assigned after April 9.

Amherst Securities Group analysts have previously said that cuspy pools will slow after the change takes effect, but there could be a near-term pop in speeds later this spring as borrowers rush to start the refinance process by April 9.

They added that loans with cases assigned April 5, 2010 through October 3, 2010 in particular might react strongly to avoid the increase as this group faced an unattractive refinancing environment following the Federal Housing Administration's six-month lockout from a streamline refi following origination. In addition, BofA buyout risks still remain for GNMAs.

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