October prepayments were higher than expected across the coupon stack for 30-year agency MBS.
Prepayment speeds on conventionals were projected to increase around 3% to 4% on average, and by twice as much for GNMAs.
However, they jumped 12% on FNMAs, 17% on FHLMC Golds and 18% on GNMAs. Factors influencing activity include a lower day count at 20 from 21 as well as lower refinancing activity with the Mortgage Bankers Association's Refinance Index down 4% on average for September versus August despite mortgage rates in Freddie Mac's survey averaging 4.08% compared to 4.26%.
CRT Capital Group mortgage analysts had warned of the potential for higher-than-expected-prepayments. They said that because of capacity constraints this report would still reflect some applications from August – including higher coupons, which take longer to process – that finally closed in October.
After holding between 4.50% and 5.0% from the spring into mid-summer, mortgage rates dropped sharply in August, which pushed the Refinance Index to an average of 4117 for the month from 2584 in July.
The increase in higher coupon JPMorgan Chase-serviced pools was notable, especially FHLMC Golds. Royal Bank of Scotland analyst Sarah Hu pointed out that there was a 10 CPR increase in these pools while FHLMC pools with other servicers did not pay that fast.
JPMorgan Chase-serviced FNMA pools also gained, but its difference with other servicers was not as great, she said, and might indicate that JPMorgan Chase is now aggressively targeting FHLMC borrowers for Home Affordable Refinance Program (HARP).
The percentage increase in GNMAs was relatively uniform across the coupon stack as buyouts hit the higher coupon 6.5%s and 7.0%s. BNP Paribas noted as well that in lower coupons, Bank of America (BofA) speeds picked up significantly with the majority of the increase in 2010 and new vintages. They believe the BofA pickup was due more to refinancing than delinquency buyouts.
The Federal Reserve is expected to have between $25 and $27 billion for reinvestment over the next period beginning Nov. 10, according to various analysts' reports. This is up from $22 billion over the Oct. 14 to Nov. 10 period. The New York Federal Reserve will announce its next tentative amount of MBS purchases on Nov. 10.
eMBS reported overall speeds on FNMA MBS jumped 9.7% to 24.8 CPR; FHLMC Golds increased 16.1% to 25.9 CPR; and GNMAs were up 16.4% to 16.3 CPR. Gross issuance totaled $95.5 billion; paydowns amounted to $117.9 billion, leaving net issuance at -$22.4 billion.
Looking ahead to the November report released on Dec. 6, speeds are projected to be little changed on average. At this time, the impact from HARP changes is not expected to be felt until possibly March, but maybe as early as February for certain servicers. The GSEs have until Nov. 15 to release guidance with operational details to servicers and lenders about these changes.
The Federal Housing Finance Agency press release said that some lenders may be able to accommodate mortgage applications by Dec. 1, while other changes such as LTVs greater than 125% should be operational during the first quarter of 2012.
Given this timeline, Amherst Securities Group had previously estimated that if applications start getting filed in late December, they'll close in February with prepayments starting to pick up in the March prepayment report. Some servicers, such as JPMorgan Chase and Wells Fargo, however, are more prepared to start accepting applications in December.