Fannie Mae 30-year MBS prepaid faster than expected in August. Speeds increased 20% in August from July versus a projection of +14%.

As anticipated, however, 5.5s and lower recorded the largest percentage gains with 2009 and 2008 vintages increasing the most.  The newer vintages are less impaired with the underlying borrowers generally having better FICOs and LTVs to aid them in refinancing. 

Still, the increases in these coupons were substantially more than forecast with 5.5s jumping 25% over the month versus a call of +16%, 5s gained 31% versus +19% predicted, while 4.5s in our sample surged nearly 54% compared to +31% anticipated.

Freddie Mac speeds increased slightly more than Fannies - +23% with an average CPR of 29 in Thomson Reuters' sample compared to 28 CPR for Fannie. Percentage increases were higher across the stack, though like Fannie's the largest increases were in 5.5s and lower.

Meanwhile, 30-year Ginnie speeds slowed on average as expected following July's buyout of TBW's delinquent loans. Speeds did increase for 4.5s and 5s, and were close to flat on 5.5s, which was substantially more than projected, while slowing in the higher coupons was also more than anticipated.

Factors influencing the August report included one additional collection day, 22, and a 16% jump in refinancing activity on average in response to a 15 basis points drop in 30-year fixed mortgage rates on average to 4.56% in July.

Overall, eMBS reports that FNMA MBS prepaid at 23.7 CPR in August, a 26.1% jump from July; Freddie's at 25.8 CPR, +31%; while Ginnies increased 5% to 19.3 CPR.  Agency MBS gross issuance totaled $100.1 billion, paydowns $118.9 billion, leaving net issuance at a negative $18.8 billion.

Regarding the Fed's MBS holdings, BNP Paribas reports the portfolio prepaid at 22.4 CPR, a 46% jump from July, with paydowns associated with prepayments totaling a net $23.1bln. 

Positive Net Supply Looms

Fannie and Freddie net issuance combined was -$31 billion; however, as Credit Suisse points out, the decline reflects a securitization lag of one to two months for new production in a rally. 

In a previous report from J.P. Morgan, analysts also noted that typically for a refinance transaction, paydowns are recorded immediately, while pooling of the new mortgage lags by several weeks.  So when refi volume is high, they said, heavy paydowns leads to a reduction in net supply in the early part of a refi event, which "is compensated by an equivalent surge in net issuance toward the end of the refi wave." 

Run-off from the Fed's portfolio also adds to the net supply.  BNP analysts projected that if primary mortgage rates rally another 10-15 basis points, Fed paydowns could increase to around $55 billion per month. The Fed's portfolio consists largely of newer 4.5s and 5s which have the best opportunity in terms of FICO and LTVs to refinance relatively easily.

September Prepayment Outlook

Updated forecasts will be forthcoming in the week ahead; however, known factors that will influence prepayments include an 18% jump on average in refinancing activity in response to a 13 basis point drop in mortgage rates to an average of 4.43% in August, while the day count declines to 21 days from 22.  Expectations for September and October (reported in October and November) have been for speeds to hold essentially unchanged from August.   

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