Prepayment rates for Freddie Mac mortgage-backed securities were flat for most coupons in the latest reporting period, resulting in "one of the most placid prepayment reports in recent memory," according to the Bear Stearns Prepayment Commentary.
Speeds were nearly unchanged for Freddie Mac 6%-8% MBS coupons, as the biggest moves in constant prepayment rates ranged from 0.3-0.7 CPR among major cohorts, analysts Dale Westhoff and Bruce Kramer said.
"In our view, this report correctly reflects current prepayment fundamentals in the mortgage market," the analysts said. "Specifically, the lagged effective 30-year rate for the August [Freddie Mac] report was still locked in its recent trading range (at 8.41%), so these numbers did not pick up the effect of the recent mortgage rate breakout to the 8% area."
The Bear Stearns analysts predicted that housing turnover will decline, pointing to July home sale numbers that reflected a 6.77% turnover rate. "If that monthly rate is sustained, it would represent a significant decline from the annual average of 7.51% seen in 1999," they said.
But the recent Freddie Mac prepayment report showed that the premium coupons are prone to rising prepayment speeds. Fannie 8.5%s also continue to trade above average 101 2/32, a difficult point to overcome.
Mortgage market sources noted that the up-in-coupon trade looks cheap, but it doesn't have the duration because prepayments are faster.
Discount coupons outperformed Treasurys after the After the prepayment report came out, showing only a slight increase in speeds for August, despite the added two days in the reporting period, discount coupons continued to outperform Treasurys. Fannie 6.5%s rose 8/32 to 95 25/32, outperforming their Treasury hedges by 3/64.
As for the upcoming prepayment reports expected from Fannie Mae and Ginnie Mae, Bear Stearns predicts FNMA speeds to be little changed from 6s through moderately seasoned 7.5s with the exception of seasoned 6s which they expect to slow 12%.
Seasoned 7.5s through 8.5s are anticipated to rise 10% to 20%. It is a similar story in GNMAs, which are expected to be unchanged to slightly faster with the exception of moderately seasoned 7.5s through seasoned 8s which they expect to rise about 10%. Bear Stearns predicts September speeds to slow 5% to 10% with 8s and higher to be little changed, though unseasoned 8s are expected to jump 25% to 30%.
PaineWebber is more aggressive in their outlook regarding August speeds. They anticipate both FNMA and GNMA prepayments to jump 15% to 30%. Drops of similar magnitude are expected in the September report, though 8.5s are seen as slowing just 10%.