Prepayments declined as expected in September as there were three less collection days. Speeds on Fannie Mae 5.5% coupons and lower were pretty much in-line with expectations.

However, higher coupons slowed more than consensus had predicted.  For example, 6s and 6.5s were anticipated to decline 5% or less and instead fell 9% and more. It would appear that less of the refinancing activity that began to show up in August closed in September. This is possibly related to delays associated with reappraisals given the slowing in the housing market and home price appreciation. However, more of the effect of the lower mortgage rates and pick-up in refinancing activity is expected to show up in the next couple of reports.

Credit Suisse analysts also suggested that there is a sizeable balance of lower loan balance pools in the 6.5 cohort as a reason too for their lack of response to the improved rate environment. 

Gold speeds slowed more than Fannie Mae in most coupons and vintages -- by almost 3%, according to RBS Greenwich Capital.  CPRs on Freddie 5.5% and higher are about 1 to 2 CPR slower than Fannie cohorts.

Meanwhile, the Ginnie Mae report was mixed. In general, seasoned bonds declined more than expected, 2004 vintages appeared in-line with expectations, while 2005 vintages recorded slight increases in prepayment speeds. 

Paydowns in September are estimated at nearly $34 billion, according to Credit Suisse, down 9% from August's $37 billion. Analysts estimate fixed rate net issuance of about $25.4 billion, up from $21.9 billion in August. The breakdown of net issuance is: $27.6 billion in conventionals, $1.9 billion in GNMAs, and -$4.1 billion in 15-year MBS.   RBS Greenwich Capital's Pankaj Jha said that year-to-date, conventional fixed rate supply is at $168 billion, about $100 billion greater than at this time last year. He warned that mortgage spreads could come under pressure if the marginal buyer doesn't emerge to absorb this excess supply.  

Prepayment speeds are expected to increase in October as the day count increases to 21 from 20, and there should be more impact from the increase in refinancing activity. Heading into the September report, consensus was predicting October speeds would increase about 6% to 9%.  Credit Suisse analysts are projected today that speeds would rise 8% to 12%, while Lehman Brothers analysts are forecasting gains of 10%to 15%.  In particular, premium coupons should see the greater influence from the decline in mortgage rates and, therefore, show the largest percentage gains in speeds.

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