November prepayments were not as bad as investors feared, given the collision of elevated refinancing activity on lower mortgage rates in response to QE3 and the rush by servicers to close loans before guarantee fees increased on Dec. 1. In fact, 2010 and 2011 FNMA 3.5% and 4.0% coupons rose slightly less than projected, while higher coupons were in line to slower. Constant prepayment rates (CPR) on these vintages, however, were at a record high.
In aggregate, 30-year FNMA speeds were 4.5% lower from October in IFR Markets' sample versus an expected 3% slowing. The story was similar in Freddies, which declined nearly 7%, versus a 4% projection. For all MBS, speeds on FNMAs declined 6.1% to 27.9 CPR and Freddies 7.8% to 28.3 CPR which were also less than the 9% indicated by two fewer collection days in the month. J.P. Morgan suggested that expansion in lender capacity may have partially offset the effects of a lower day count. At the same time, constraints remain and Barclays said this may have kept lower coupons from increasing as much as was expected.
In the HARP coupons (5.5s and higher), speed declines on average were in line with expectations on FNMAs and slightly more than predicted on Freddies. Of note, however, Bank of America pools held at their elevated levels that showed in October, while Wells and Chase were lower. RBS MBS analysts said that prepayments between fast and slow HARP refinancers are beginning to converge. J.P. Morgan made a similar observation, commenting that "This lends support to the theory that HARP speeds have peaked, though peak levels will likely be sustained into next year."
Of course there remains upside risk from further tweaks to HARP 2.0, potential passage of the Boxer-Menendez Bill and possible replacement of acting FHFA Director DeMarco following President Obama's re-election. In addition, a new rep and warrants framework goes into effect on Jan. 1 which may stimulate further cross-servicer refinancings.
In 30-year Ginnies, speeds on average declined more than expected largely due to a sharp decline on 5% coupons and above: 13% to 18% versus a projected decline of 3% to 7%. Meanwhile, 3.5s and 4.0s were faster than predicted at, up about 20% percent versus a predicted increase of 5%.
One reason for the slowing up in coupon is reduced refinancings from pre-June 2009 borrowers following the mid-summer surge after mortgage insurance premiums were lowered for this group of borrowers. Another reason appears to have been very limited buy-out activity from Bank of America.
Like conventionals, speeds on all GNMA MBS declined less than indicated by the lower day count, with a 4.1% decline to 23.3 CPR.
Agency MBS gross issuance totaled $196 billion, and paydowns were $141 billion, resulting in net issuance of $54.4 billion.
Looking ahead, December speeds are expected to be little changed from November. The number of collection days is a large influence and is unchanged from November at 20. In November, the MBA's Refi Index was 4% lower than in October; however, on a four-week moving average basis, the index was up over 3% at the end of November. An updated prepayment outlook will be out in the next week.
