For the November report, Fannie Mae/Freddie Mac prepayments slowed to an average of 20% across all coupons and vintages. Speeds for the month “took a giant step toward converging to our long run expectations,” said Bear Stearns.
Bear attributed the slowdown to shortened month, as there are the four less business days in November. Another factor is the continued drops in refinancing demand. Despite mortgage rates falling to 6.00% from 6.25% over the period, there was no residual refinancing seen in the numbers.
“Today’s report is generally consistent with our projections which have been on the slow side of Street expectations,” wrote analysts.
There was a significant decline in volume of mortgages with rates above 6.0%. With this sector still theoretically refinaceable, there has been a lot of uncertainty with regards to the timing and magnitude of the slowdown. But 16 months of nonstop, heavy refinancing activity has finally resulted in a classic burnout response from the remaining borrowers in these pools, said Bear.
Because of this, all coupons over 6.0% are now paying between 40 and 50 CPR and are probably going to trend down towards the 30 to 40 CPR levels in coming reports. Bear also thinks this sector will remain insensitive to rate changes going forward.
As expected, Fannie and Freddie prepayments have fully converged across the coupon stack. In most cases, Freddie prepayments are currently only within one or two CPR of its FNMA counterpart in the major cohorts for 30-year product. Bear said that this should continue to support a narrow Fannie/Freddie TBA price spread.
To Bear, the biggest surprise was “the resiliency of the 2002 vintage 5.5% coupon.” This coupon, which is currently priced at par, has been out of the refinancing window for four consecutive months. However, Bear said it still pays well above expectations, which was 15 CPR in November. This may be a result of record housing turnover levels and attractive refinancing alternatives still available in the hybrid sector.
Despite record refinancing volumes in the summer of 2003 delaying the fourth quarter slowdown in prepayments by at least one month, the November numbers bring the market to prepayment levels consistent with prior refinancing waves.
“Indeed, on a relative coupon basis, the numbers are nearly identical to levels experienced four months after the fourth quarter 2001 refinancing spike,” said Bear.
Going forward, with mortgage rates around 6.0% and the Refinancing Index in the low 2000’s, analysts expect prepayments to continue their descent, though at a much slower pace than the past two months.