Prior to the release of the June prepayment report last Friday (reflecting May activity), analysts were predicting a slowdown in May speeds.

April speeds were the peak of the recent mini-refinancing wave, Citigroup Global Markets said. The firm had expected speeds to drop considerably for the June report. Citi's aggregate speed model predicted speeds of roughly 23% to 24% CPR in May, a decrease of about 30% from the prior month. This dip should largely reflect the increase in interest rates and a 1.5-day drop in day count. It should also totally offset the rise in turnover seasonals as housing sales usually rise by roughly 10% from April to May.

Meanwhile, JPMorgan Securities had expected May speeds on FNMA 30-year 2003 5s to decline 15%, to 13% to 14% CPR, and 2003 5.5s to decline 25% to 28% CPR. They had also predicted 2002 6s will decline 20% to 45% CPR, and 2002 6.5s to decline 25% to 46% CPR.

At the vintage level, Citi had expected speeds of cuspy 5s and 5.5s to drop the most - declining between 40% and 50%. Speeds of higher coupons are probably going to drop 10% to 15%.

In terms of expectations for the July report (reflecting June activity), there are two key considerations. June has two more business days versus May and it is also usually a peak month for housing turnover. The slowdown in refinancings is likely to offset these two factors. Citi predicts aggregate June speeds to be in the area of 21% to 22% CPR.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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