May prepayments were much slower than expected. Previously, consensus on the Street was that there would be declines of just around 1% or so from April.

However, speeds declined about 17% on average for conventionals and 8% for GNMAs.  The 2007 and 2006 vintages recorded the largest percentage declines, as expected, at -22% and -26%, respectively, in FNMAs, versus expectations of 2% to 3% lower.

In GNMAs, seasoned discounts were flat to just slightly lower. The 2007 5s actually prepaid faster by 36% with 06s 13% slower.  In 5.5 vintages, 2007 and 2006 5.5s slowed 27% and 11%, respectively.   

eMBS reported the aggregate CPR on 30-year FNMAs was 10.3 in May versus 13.0 in April; FHLMC Golds was 10.5 versus 13.0; and GNMA was 12.7 versus 15.3, all down in the neighborhood of 20%. Total paydowns were $48 billion compared with $58.1bln in the previous month. Issuance totaled $119.3bln, up from $107 billion.    

Credit Suisse analysts said the refinance response in the 5.5% through 6.5% 06 and 07 vintages point to "a notable downshift." 

Lehman Brothers also commented on the significant slowing in premium speeds saying that it is "beyond weaker housing" alone. Analysts said that one reason is the jump in rates over a shortened rate-lock period. For example, from the end of April to mid-May, Freddie Mac reported the 30-year fixed mortgage rate rose from 5.88% to the low 6.0% area. 

The May report added to the extension risk in the market. Credit Suisse warned that this could cause servicers to further slow their models, which would result in less buying in a rally and more shedding in a sell-off. 

In terms of the June report, speeds are expected to slow around 1% or so. This is likely to be revised to report a larger decline, in part, as refinancing activity on average in May was down 16% from April based on the Mortgage Bankers Association's Refinance Index. Further impacting speeds will be the additional credit-based fees that went into effect on June 1.

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