March prepayments are expected to rise by two to five CPR as February lows in rates impact prepays just as seasonals are increasing, said Deutsche Bank Securities. For instance, analysts expect conventional 5s to pick up by three to four CPR and to remain at those levels throughout April and May. The recent 40 basis point rise in mortgage rates could start to cut into prepay rates in April and May, report analysts, but only on higher coupons. All told, 30-year prepays on 30-year 5.5s could rise by three to four CPR in March while decreasing by two CPR in April.
"Our expected prepayment speeds place mortgages well within a very comfortable zone, with turnover speeds still quite high (given the robust housing market) and refinancing speeds remaining subdued given the recent increase in mortgage rates," Deutsche Bank analysts wrote.
Lehman Brothers expects 30-year conventional paydowns to be 30% to 35% higher in March. This is mostly expected and should be no surprise to investors, Lehman analysts said. Due to elevated mortgage rates, Lehman predicts that application activity would slow in the coming weeks. This, combined with a shorter business calendar, is expected to cause a 15% drop in April prepays assuming that rates stay at current levels.
Meanwhile, the Mortgage Bankers Association reported last Wednesday that the Purchase Index dropped by 3.5% to 446.4 from 462.8 the prior week while the Refinance Index dipped by 16.5% to 1894.4 from 2267.5 the previous week. Michael Fratantoni, MBA's senior director for single-family research and economics, said that the recent mortgage rate increase has reduced application activity across the board, especially for refinancings, adding that current refi applications are down more than 60% compared to the same period last year. JPMorgan Securities expected the MBA Refi Index to dip to 2000 last week and to experience further declines this week to 1800.
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