Street consensus estimates show prepayment speeds slowing 7% to 8% in October. The limited decline is due to relatively stable refinancing activity resulting from lower mortgage rates, partially offsetting the lower day count - 20 days versus 21 days in September. Mortgage rates averaged 5.77% in September, versus 5.82% in August. Refinancing activity, meanwhile, was down just slightly, averaging 2192 in September versus 2264 in August. Looking ahead, November speeds are anticipated to slow roughly 8% with December slowing an additional 5% to 6%.
Despite the slowing, speeds on discounts should remain faster versus historical comparisons. In a recent report from Credit Suisse First Boston, analysts stated that cash-out refinancings will likely prop up discount speeds. Researchers note that in April 2005 and June 2004, when refinancing exposure was similar to today, the Mortgage Bankers Association Refinance Index stood at 1799 and 1455, respectively. The Refinance Index has yet to fall below 2000 despite the increase in the no-point 30-year fixed rate mortgage rate to over 6% for the past four weeks.
David Montano, head of mortgage research at JPMorgan Securities, said that despite the recent increase in mortgage rates, the Refinance Index "simply refuses to drop below 2000," adding that the current Index is about 15% higher compared to last spring, even with the similar 30-year mortgage rates. The Purchase Index is also higher by 10%.
Montano attributed the elevated activity to the increasing use of affordability products; and the refinancing from seasoned and fully indexed ARMs into fixed. CSFB analysts add that HELOC borrowers may be interested in cashing out to pay-off these lines of credit that are tied to the prime rate, which will continue going up as long as the Federal Reserve holds to its measured rate plan.
Meanwhile, mortgage rates continue rising, according to Freddie Mac's weekly survey. Last week, the 30-year fixed mortgage rate rose to 6.10% from 6.03%, the 15-year fixed rate rose to 5.65% from 5.62%, the 5/1 hybrid ARMs rate went up to 5.59% while the one-year ARM rate averaged 4.89% versus 4.85% the previous week.
Freddie Mac economists said that despite the rise in mortgage rates in the last two months, housing starts increased in September, a testimony to the housing market's resiliency. The economists also pointed to housing directly contributing to the 19% real GDP growth seen in 1Q05 and 23% increase in 2Q05, equivalent to 17% of real GDP growth in the whole of 2004.
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