Given that 30-year fixed mortgage rates averaged 44 basis points lower to 6.04% in September compared with August's average, while the Refinance Index was up 64% to 1725,

October prepayments were expected to surge. Conventional speeds were estimated to be up nearly 50% overall, while GNMAs were predicted to increase between 10% and 15%. 

Prepayment speeds, however, increased substantially less than expected. FNMAs increased 16% overall, and FHLMC Golds were higher by 18%.  Meanwhile, GNMAs prepaid 2% slower. The largest percentage gains were in 2007 and 2006 vintages.

By coupon on the conventional side, 5%s prepaid in line with expectations. However, 5.5s and 6s increased nearly 20% on FNMAs and 25% on FHLMC Golds versus an expectation of 44% and 67%, respectively. 

The 6.5s increased less at 16% on FNMAs and 10% on FHLMC Golds, compared with a 59% projection. 

Finally, 7% coupons were estimated to pick up 37%, but increased only 7% in FNMAs and 17% in Freddies.

GNMA speeds increased half as much as expected in 5% coupons, up 7%, 5.5s prepaid 6% slower, 6s increased just 4% versus a prediction of +26%, 6.5s slowed 14% on average and 7%s were also slower by 8% from September.

Credit Suisse analysts enumerated some reasons why prepayments did not increase as much as expected. A possible reason is that the magnitude of multiple refinancing applications could have been highly exaggerated compared to previous month. This would lead to overstatement of the Mortgage Bankers Association's (MBA) Refinance Index.

Another reason they said is that lenders may be having difficulty tapping into lines of credit to fund loans as a result of the credit crisis,  and so are having to reject loans. Finally, a longer appraisal process could be delaying the process.

According to eMBS, FNMAs prepaid at 8.2% CPR, 1.6 CPR higher than September; FHLMC Golds prepaid at 8.7%, +1.8 CPR from previous, while GNMA was virtually unchanged at 10.1% CPR compared to 9.9% CPR. Gross issuance totaled $69.9 billion with paydowns totaling $43.1 billion.  Net issuance was $26.8 billion with GNMAs making up 84% of that amount.  It is notable that FHLMC Golds net issuance was a negative $2.3 billion.

While prepayment outlooks will be updated following this report, speeds in November have been expected to be down 15-20% from October. 

Contributing to the slowing is four less collection days and a back up in mortgage rates and decline in refinancing activity.  For the month of October, 30-year fixed mortgage rates averaged 6.20%, 16 basis points higher compared to the previous month, while the MBA's Refinace Index averaged 24% lower to 1317. 

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.