Refinancing response has been relatively muted relative to the historically low mortgage rate levels that the market has been seeing lately.

The Mortgage Bankers Association's Refinance Index in the week ending April 17 was at 6,541 with the 30-year fixed mortgage rate at 4.82%, according to Freddie Mac.

In early January 2009, the index surged to over 7,000 as mortgage rates moved toward the low 5.0% area. To put this in context, in the peak refinancing period of the summer of 2003, the Refinance Index surged to between 9,000 and 10,000 with mortgage rates between 5.20% and 5.30%.

Bank of America/Merrill Lynch mortgage analysts attributed the low volume in mortgage originations to a combination of factors. They mentioned some originators not being ready to accept streamlined refinancings under the Homeowners Affordability and Stability Plan (HASP) as well as correspondent origination channels not being active for the HASP refinance program. They also noted the mortgage rate sensitivity of borrowers. The analysts said rate-lock volume declines sharply when the 30-year conforming rate moves closer to 5.0%.

Meanwhile, JPMorgan Securities also noted that originators are not yet staffed to appropriate levels, contributing to ongoing capacity constraints. Additionally, there were perhaps overly aggressive expectations on the immediate refinance response following Freddie Mac's removal of its loan-level pricing adjustments, analysts said. The LLPA's were just repealed on April 1.

Keefe, Bruyette & Woods (KBW) analysts also said ongoing capacity constraints within the mortgage industry were adding to the reduced mortgage originations.

"Based on our conversations with mortgage originators, it appears unlikely that they will be able to increase volume in any meaningful way until late 2Q09," they said in a report. In addition to the decline of industry employment levels, originators have to deal with setting up systems to deal with the new programs and need to alter servicing systems to respond to the loan modification aspect of the government's plan. As a result, analysts anticipate that it won't be until late in the second quarter and into 2010 that strong GSE volumes will be seen.

Outside capacity constraints, other factors contributing to the lower refinance volumes are ongoing declines in home prices, which are pushing LTVs past the government program's limit of 105%, and increased unemployment.

Fitch recently said it expected home prices to decline another 12.5% from year-end 2008 levels, which would put home prices back to around 2002 levels. Meanwhile, KBW economists are calling for the unemployment rate to peak at 12% in the first half of 2010.

Prepayment Outlook

Currently, April speeds are projected to increase over 20% for FNMAs and less than half that much for GNMAs. Paydowns are estimated in the $125 billion area, which puts expected net issuance for April at around $10 billion, down from $72 billion in March. The reports come out on May 6.

Contributing to the increase is a decline in mortgage rates and an increase in mortgage application activity in March in response to the initiation of President Obama's Housing Plan and the rally following the Federal Open Market Committee's announcement to increase MBS purchases and to buy longer Treasurys. On average, the 30-year fixed mortgage rate averaged 5.00% in March compared with 5.13% in February, while the Refinance Index averaged 5233, a 51% jump from the previous month's average.

May speeds are projected to jump around 40% from April on FNMAs as more of the impact of the GSE's refinance programs is felt. Specifically, moderately seasoned 6s are expected to reach near 50 CPR from the mid-to-low 30 CPR levels in the March report; 6.5s in the low 40s compared to high teens recently; and 7s in the mid-to-high 30s from the high teens to low 20 CPR area.

Buyouts Expected to Pick Up

Delinquency buyouts in the higher coupons will be a major contributor to the speeds picking up in the premium coupons. Barclays Capital analysts believe buyouts should start showing up over the next couple of months and warns investors of credit-impaired collateral that they "should consider exiting these pools."

Meanwhile, JPMorgan analysts added that while the higher coupons are appealing over the near term, "investors in this sector are ultimately playing with fire."

Barclays Capital projected that delinquency buyouts could add 9 to 10 CPR to FNMA 30-year 2006-2007 production speeds over the next year, "accounting for over 20% of total prepayments."

Referring specifically the 6.5% coupon, they said buyouts could add 17 to 18 CPR and account for over 35% of total speeds. JPMorgan analysts recommended an underweight to 6.5s. But if investors want to remain in the high premium sector, they suggested moving to call-protected alternatives such as 10/20s, Geos (such as New York) and loan balance.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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