On Feb. 10, Freddie Mac made an unexpected announcement that it would "purchase substantially all 120 days or more delinquent mortgage loans from the company's related fixed-rate and adjustable-rate (ARM) mortgage Participation Certificate (PC) securities."
The GSE said these purchases would be reflected in the factor report released on March 4. Later in the day, Fannie Mae made a similar announcement that its buyouts will begin in March - which will reflect in the April factor report - and take place over a few months' time.
The increase in GSE buyout activity had been expected by the mortgage market when these agencies' adopted FAS 166. However, most analysts thought that it would be at a more orderly pace to limit the market disruption since this is happening at the same time as the Fed's winding down of its MBS purchase program.
The near-term landscape in Fannie Mae prepayments has gotten more complicated. While Freddie Mac will take care of delinquencies for the most part in one full swoop in February, Fannie Mae said it would begin its buyouts in March and continue for a few months.
In their outlooks, mortgage analysts had assumed Fannie would spread this pro rata across coupons over a three- month window. However, Deutsche Bank Securities analysts in a recent report pointed out that it made more economic sense to buy out all the higher coupons first, middle coupons next, followed by the lower coupons at the end.
At this time, it appears some idea of the pace and target isn't likely until April 6, although JPMorgan Securities analysts said that debt issuance numbers could provide clues to the overall time.
Analysts also noted that it is in Fannie Mae's best interest to complete this process as fast as possible, and, while funding isn't seen as an issue, they think a complicating factor is the servicers' ability to temporarily raise funds to assist in the buyouts. JPMorgan analysts believe the large servicers are likely more prepared to do this than the smaller ones. Still, they think, buyouts will likely be front loaded.
FHLMC Gold speeds are expected to jump 200% on average to a 52 CPR in February from a 17 CPR in January. Following that, speeds are projected to drop more than 50% to an average 22 CPR in March and hold at that level in April.
Meanwhile, FNMA speeds are expected to remain essentially flat in the upcoming report - released on March 4 - with slight slowing in lower coupons offsetting slight increases in higher ones. Factors influencing speeds include the the unchanged number of collection days (there are 19) and a 4% decline on average in refinancing activity in January as mortgage rates ticked higher, while buyouts will be relatively muted. March prepayment speeds are currently projected to jump over 100% to 38 CPR from 19 CPR and hold there in April as the buyouts begin.
Once Fannie Mae and Freddie Mac complete their buyouts of current delinquencies, expectations are that speeds will be higher versus recent levels due to more active buyouts as loans become four months delinquent, and from increased refinancing activity that will be more exposed as the pool will consist of cleaner collateral.
GNMA speeds, meanwhile, are projected to be flat in February, increase less than 20% in March due in large part to a higher number of collection days (23 versus 19) and decline less than 10% in April as the day count reduces by two days.
Delinquencies were cleaned out by the end of the year for the largest servicers, with most expecting a few months' break before servicer buyouts ramp back up.
Paydowns are projected to total around $128 billion in February, with Freddie Mac buyouts contributing 60% to that total. This compares with $77 billion in January and is the highest in several years. At this time, March paydowns are estimated at $130 billion as Fannie Mae's share kicks up to over 60%.
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