The May prepayment report was fairly uneventful with speeds on FNMA 30-years mostly in-line with expectations. Noteworthy were speeds on certain discount vintages that were slightly slower than previously anticipated. These results could indicate a sooner-than-expected slowing in the housing market.
In FHLMC Golds, percentage increases were mostly higher than corresponding FNMAs, particularly for discount coupons. Speeds on FNMA discounts were generally running slightly faster than Golds, and similar on par and premium coupons.
Prepayment speeds on GNMAs were modestly faster than expected for 4.5% and 5% coupons, and in-line to slightly slower than estimated for higher coupons. CPRs continue to run substantially faster for most coupons and vintages versus conventional cohorts. However, the difference is less in the higher coupons. Bear Stearns analysts reported that the prepayment differential between FNMAs and GNMAs has narrowed significantly in the more recent originations, "suggesting that the GNMA program changes in 2005 are having an impact," they said.
May paydowns are estimated at nearly $39 billion, up from $35 billion in April, according to Credit Suisse. Fixed-rate net issuance totaled $15 billion - which is down from $23.6 billion previously - on a combination of conventional net issuance of $21 billion, 15-year net issuance totaling negative $6.0 billion, and less than $1 billion in net issuance from Ginnie Mae. Analysts also note that agency 30-year conventional issuance was down from $28.4 billion in April.
Looking ahead, speeds in June are anticipated to increase less than 5% in FNMA 4.5s and 5s, and be flat to slightly slower in higher coupons. Not too much change is expected as mortgage rates averaged just 10 basis points higher in May, compared to April (6.61% versus 6.51%); the Refinance Index was just 6% lower on average (1444 versus 1528), and the day count remains unchanged at 22 days. Further out, early estimates have speeds declining around 10% in July, and increasing 10% in August. There are day count influences in those reports with just 20 collection days in July, increasing to 23 days in August.
UBS analysts believe that the relationship between mortgage rates and the Refinance Index should start behaving more in line with tradition. They expect that as mortgage rates continue their move higher, the influence of hybrid refinancings on the Refinance Index will diminish, allowing mortgage rates and the Refinance Index to "reconnect."
Bear Stearns' Senior Managing Director Dale Westhoff echoes this sentiment. He believes that, over the next few months, there will be a more pronounced slowing in speeds as the rate of home price appreciation moderates and the full impact of the increase in mortgage rates are factored in. Westhoff adds that there are virtually no refinancing options available within the traditional amortizing ARM or fixed-rate sectors at this time. Thus prepayments are expected to converge with historical norms.
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