The November prepayment reports released last week showed speeds on 30-year fixed rate mortgages falling 16% from October.
Bear Stearns researchers report that aggregate prepayments on 30-year FNMA product dipped 3 CPR to 15.4 CPR while FHLMC 30-year collateral came in at 14 CPR, dropping 2.4 CPR from the prior month.
The prepayment decline was fairly even across the coupon stack, according to Bear Stearns researchers. Prepayments on the benchmark FNMA 5.0%, 5.5% and 6.0% coupon cohorts dropped 19%, 18% and 20%, respectively. Meanwhile, higher coupons showed a more modest dip in speeds.
Discount speeds dropped slightly more than expected - a first in recent history - Bear analysts noted. However, despite the decline, discount speeds remain at historically high levels, resulting from robust cash-out refinancing and housing turnover activity. For example, prepayments on fully seasoned 2003 vintage 5.0s, with a weighted average coupon almost 50 basis points below prevailing rates came in at 12.5 CPR in November, more than 4 CPR above the 1999/2000 number, after seasonal adjustments.
FHLMC 30-year prepayments are still slightly slower relative to FNMA counterparts across most coupons and vintages. Month-to-month changes in FHLMC speeds were quite close to FNMA counterparts except for the 6.0% coupon, where the drop in FHLMC prepayment speeds was significantly less than FNMA, Bear analysts said. For instance, new FHLMC 6.0s dropped to 20.8 from 24.4 CPR - equivalent to 15% - while FNMA declined from to 21.8 from 27.5 CPR, a 21% dip.
JPMorgan Securities analysts expect an added 8% drop in December prepayments reflected in the January report, with 30-year 5.5s and 6s dropping the most in the 10% to 12% level. The Mortgage Bankers Association Refinance Index suggests a 25% decline, which is rather substantial, said JPMorgan. The turnover pace should also slow by 8%, with analysts citing seasonal factors, although there are 1.5 additional collection days in December compared to November.
Prepayments on 30-year GNMA collateral dropped less compared to conventional counterparts, dipping 9% in November, said Bear Stearns. Overall prepayments on 30-year GNMA mortgages were 21.3 CPR in November, falling 2 CPR from the prior month. Aside from the 2005 cohorts where GNMA speeds are slightly slower than conventional speeds, the GNMA/conventional prepayment gap rose by almost 1 CPR from the prior month. "Nowhere is the difference more striking than in 4.5s of 2003 where the GNMA cohort is paying at 14.6 CPR, 5.8 CPR faster than FNMA and 6.7 CPR faster than FHLMC," Bear analysts wrote.
Merill Lynch analysts said that the housing market's health could be deciphered based on the way GNMAs prepay versus conventionals. With accelerated home price appreciation, GNMAs have prepaid faster versus FNMAs since Ginnie Mae borrowers, on average, are more levered compared to conventional borrowers and, therefore, are more likely to take cash out of their home if the opportunity arises, said Merrill analysts. High home price appreciation also allows some of these borrowers to lower their LTV enough to qualify for a conventional loan, allowing them to eliminate their mortgage insurance premium.
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