Speeds increased more than projected in October due primarily to much stronger Home Affordable Refinance Program (HARP)-related activity than was expected – particularly from Bank of America.
The 30-year FNMA speeds were predicted to increase 10% to 15% on 3.5s and 4.0s and by around 10% on higher coupons; however, CPRs were up between 3% and 8% on average on the lower coupons and by 15% to 20% on the upper ones. The trend was similar in Freddies as well.
Barclays Capital MBS analysts pointed out in their prepayment commentary that the increase in pre-HARP cohorts (2006-2008), while broad based across the major servicers (Wells Fargo, JPMorgan, Citi), was especially pronounced in BofA-serviced loans and in its Countrywide portfolio. RBS's mortgage strategist added that excluding BOA, the increase in higher coupons was largely in line with the day count which rose to 22 from 19 in September.
There were some changes made in September to HARP 2.0 that could have contributed to the larger than predicted increase in speeds in October beyond the higher number of collection days, Barclays said. These changes included: waiving of rep and warrants where a new appraisal has been ordered; an alternative for income verification that considers the borrower has sufficient reserves to cover 12 monthly payments, and reduced documentation for some cross-servicer refinances.
JPMorgan Securities believes that HARP speeds should stay near these peak levels through year-end and possibly well into 2013.
Meanwhile, Barclays warned "the November report seems to signal a paradigm shift for Bank of America pre-HARP speeds."
Deutsche Bank Securities cautioned as well that BofA's outstanding volume of HARP-able loans exceeds that of Wells, Chase and Citi combined. They added, however, that unless HARP is extended beyond the scheduled sunset of December 31, 2013 while rep and warrants remain relatively stiff for cross-servicer refinances, even at the faster speeds the bank will still have a large amount of un-refinanced volume left.
"That makes holding high-coupon Bank of America collateral one of the highest risk-reward trades," they observed," Deutsche analysts said. The risk though would seem to have risen given that President Obama was re-elected. This could lead to a new director being appointed to the FHFA who would support programs that make it easier for borrowers to refinance, such as further extending the HARP deadline, making it easier for cross-servicer refinancings, or principal forgiveness.
There is a new rep and warranty framework also that is effective Jan. 1 that could broaden the amount of lenders participating in HARP as well as increase cross-servicer refis. Information from the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) suggested there are many banks that have not participated yet in the HARP.
GNMAs Prepay Faster Too
Speeds on 30-year GNMAs also were faster than expected. IFR Markets' sample predicted speeds increasing between 6% and 8% on average; however, they jumped between 10% and 15%. It appears that BofA was a main influence again – across most of the coupon stack.
In addition to delinquency buyouts, other influences particularly in the lower portion of the coupon stack were the record low mortgage rate levels, and for pre-June 2009 borrowers the reduction in upfront and annual mortgage insurance premiums (MIPs).
In regards to delinquency buyouts, BofA remains near the 5% mandated cap, but no large scale buyouts are likely given its financial state. Barclays says BofA will likely purchase just enough to remain under the cap and should continue to focus on the higher-WAC loans due to the economic incentive. "As a result, buyout risk in the higher coupons (particularly GNMA 5.5s) remains more elevated in the near term," they stated.
Recap and Look Ahead
Overall, eMBS reported speeds on FNMA MBS jumped 12.1% to 29.7 CPR in October from 26.5; FHLMC was up 10.4% to 30.7 from 27.8, while GNMAs surged 15.2 to 24.3 from 21.1. Gross issuance totaled $132 billion, while paydowns were $149.7 billion which resulted in net issuance of -$17.5 billion.
In November, some mortgage analysts are expecting an increase of 10% to 15% in lower coupon speeds. While the number of collection days dips to 21 from 22, mortgage rates dropped to an average of 3.38% from 3.50% which led to a spike in refi activity in late September through mid-October. An updated prepayment outlook will be out in the next week.