In what may be the formation of a summer prepayment plateau, overall prepayment speeds for premium coupons - those above 8.5% - have begun a slowdown, while discounts have shown some pickup.
For Fannie Mae, premium 8.5s and 9.5s decreased by 7% and 6% to 16.4% constant prepayment rate and 15.6% CPR, respectively. Higher mortgage rates, which climbed about 40 basis points throughout the month of June, were considered the culprit for the slowdown, according to Warren Xia, prepayment analyst at Banc of America Securities.
"In contrast with turnover speeds, which have a shown a strong variation month-to-month as a result of difference in collection days, speeds on premium mortgages have exhibited a gradual slowdown," added Rajan Dabholkar, a prepayment specialist at Credit Suisse First Boston.
For Fannie Mae discounts, speeds increased, with 6.0s and 6.5s increasing by 9% and 11% to 7.4% CPR and 9.1% CPR, respectively, defying expectations that they would decline. "The Street had expected the discount speeds to decline somewhat in June given the sharp increases last month and the disappearance of the calendar-day effect in June," said Xia.
By contrast, Freddie Mac discounts, from 6s to 7s, accelerated by 20% to 35%, partially due to two more collection days during the month of June.
Premium speeds were mixed, with 8s and 8.5s decreasing by 2% CPR to 4% CPR, while speeds for 9s and 9.5s increased by 4% CPR to 5% CPR.
Going forward, for Freddie Mac speeds, Dabholkar said that for July, speeds should decline by about 10%, with two less collection days, while premiums should continue at the same rate.
"While discount speeds are probably at their highs for the year, we still expect historically high levels for the remainder of the year due to non-economic cash-out refinancings and continued high levels of actual housing turnover," said Paul Check, a prepayment analyst at Morgan Stanley Dean Witter.
"With the Freddie Mac 30-year Primary Mortgage Market Survey dropping back to 8.16% for the week ending July 7, we expect the MBA purchase and refi indices to remain relatively steady at their current levels," Xia added. "This would translate into relatively stable prepayments for premium coupons for August and beyond."
