A sharp decline in prepayments is expected in November, to be reflected in the December prepayment reports. Street consensus currently predicts speeds on 30-year FNMAs to slow around 16% to 17% from October. Factors impacting the report include November's 20 business days versus 20.5 in October; an increase in mortgage rates to an average of 6.07% in October versus 5.77% in September; and a decline in the Mortgage Bankers Association Refinance Index to a 1970 average in October versus 2191 in September. Preliminary estimates show prepayments decreasing around 10% in December and 20% in January, meaning speeds of around 12 CPR in January from 20 CPR in October.
David Montano, head of mortgage research at JPMorgan Securities, expects a 15% decrease in November prepayments, citing factors including seasonal turnover slowing by 8% to 10%. Consequently, he estimates paydowns to be $44 billion and net fixed-rate supply to total $18 billion.
The fixed rate universe's refinancing exposure stands at 11% - its lowest level since 4Q00 - according to Bear Stearns Senior Managing Director Dale Westhoff. Aside from higher interest rates and seasonal factors, Westhoff says that continued yield curve flattening or inversion, moderation in the housing sector, and less economically attractive cash-out refinancing opportunities will drive speeds lower going forward.
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