Prepayments in May increased less than initially expected. Speeds on FNMA were predicted to rise about 10% for 5.5% and lower coupons, and 6s and 6.5s slightly less at 7%. Actual speeds, however, were 4% higher on average in the lower part of the stack, and up 2% for the upper part. The story was similar in FHLMC Golds. However, speed increases were slightly higher versus FNMA. For example, the lower stack increased about 6% on average, while higher coupons rose 4% from April. In particular, speeds on conventional 2006 vintages were essentially flat to slightly lower in 5s, 5.5s and 6s. JPMorgan Securities analysts said the housing weakness is having the most pronounced impact on the 2006 cohort.
GNMAs also prepaid slower than expected. But, the unseasoned vintages were more in line with the consensus call. The 2005 5%s increased 16% versus expectations of 9%; 2006 5.5s at 21% versus 15%; and 6s at 11% versus 12%. The 2006 6.5s, however, declined 7% from April's speeds.
Prepayments are expected to increase due to a higher day count and strengthening seasonals. But the slowing housing market and tighter lending standards partially offset these factors. Lehman Brothers analysts believe that a substantial increase in the guarantee fee for the credit impaired, Alt-A-like products muted speeds in the higher coupons. They said that high SATO premium speeds should continue to suffer from stricter lending requirements and thus display less callability compared with last year.
Paydowns are estimated at nearly $41 billion, according to Credit Suisse, up from $40 billion in April. Fixed-rate net issuance jumped to $32.4 billion from $23.3 billion, Credit Suisse analysts said, with FN/FH at $35.5 billion and GNMAs at $2.1 billion.
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