Lower coupon speeds increased less than was expected in November given the elevation in the Mortgage Bankers Association's Refi Index that averaged near 5000 over September, October and November. As a result of capacity constraints at mortgage lenders that limited the amount of refinancings they could process, this spilled over into December resulting in prepayment speeds being unexpectedly higher.

Speeds on 30-year FNMAs were projected to slow between 2 percent and 3 percent on average in IFR Markets' sample with 5 percent and lower coupons declining 3 percent to 5 percent and Home Affordable Refinance Program (HARP) coupons slipping by 1 percent to 2 percent. Speeds, however, increased between 6 percent and 8 percent on 4.0 percent coupons and above. The story in Freddies was similar with speeds predicted to slow over 4 percent on average but they increased by a like amount.

Of particular interest in the report was the increase in HARP coupons where burnout is not showing and recent developments suggest they won't be for some time yet. In particular, speeds on Bank of America pools which jumped in October and held in November were little changed to slightly higher in December.

Yesterday the Federal Housing Finance Agency said it had approved an agreement between Fannie Mae and Bank of America to resolve claims on mortgages sold to the GSE between 2000 and 2008. In addition, BoA agreed to sell over $300 billion in servicing rights to Nationstar and Walter Investment (Greentree). Both firms indicated plans to provide refi opportunities to the borrowers through HARP 2.0.

The agreement also could lead to normalization in the business relationship between FNMA and BoA which has been strained since 2011, said Walt Schmidt of FTN Financial in a Mortgage Strategy Brief. "Since 4Q11, BofA has not sold any loans to FNMA, and that may soon be changing. It may also impact how aggressively BofA pursues HARP refis with its existing book," said Schmidt.

Likewise, Barclays Capital pointed out that speeds on pre-HARP Countrywide pools that are serviced by Greentree have been much faster than BoA-serviced pools and that as the transfer is completed these pools could see similar speed increases if history is any guide. As for HARP speeds "This announcement suggests that there still is a lot of wind behind the sails of HARP 2.0," said Barclays MBS analysts. In addition they think it likely that HARP speeds will "remain sustained throughout 2013, if not higher" due to the new reps and warrants framework that became effective in 2013, likely future changes to cross-servicer guidelines, and large margins on HARP originations.

In addition, there are some other potential changes that could keep HARP-related refinancings active. This includes the prospect that acting FHFA director Edward DeMarco will be replaced with someone more favorably disposed to principal forgiveness for credit-impaired borrowers; possible passage of the Boxer-Menendez bill that could lead to more cross-servicer refis; continued expansion in mortgage banker capacity, while the HARP which is scheduled to end on Dec. 31, 2013 is likely to be extended.

Prepayments on 30-year Ginnies were also faster than expected, particularly in 5.5s and 6.0s which jumped 13 percent on average versus a projected 2 percent increase. Influences appear to be ongoing refis associated with pre-June 2009 borrowers, as well as, delinquency buyouts from BoA.

Overall, speeds on FNMA MBS increased 1.1 percent to 29.0 CPR according to eMBS; Freddies rose 0.7 percent to 29.0 CPR, and GNMAs prepaid at 23.5 versus 23.2 previously. Gross issuance totaled $124 billion, down sharply from the surge to $196 billion in November as servicers rushed to close loans before a 10 basis points increase in the guarantee fees took effect on Dec. 1. Paydowns amounted to $145 billion which resulted in negative net issuance of $21.2 billion.


Looking ahead to January, speeds are expected to be flat to slightly higher. While the number of collection days increases to 21 from 20 it is expected to be offset by a 9 percent decline in refinancing activity in December from November related to year-end slowing. An updated prepayment outlook will be out in the next week.


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