Prepay speeds lower in August versus expectations

Prepayment speeds in August were previously expected to increase less than 5% overall. However, they slowed around 3% to 4%. There was a two-day increase in the day count compared with July, but the reduced refi activity in July offset this. The decreased number of refinancings were a result of slightly higher mortgage rates, tighter lending standards, and flat HPA, with many areas of the country showing negative HPA recently. FNMA speeds declined by about 3% on average for 4.5s through 6.5s. Speeds on FHLMC Gold and GNMA securities were also slower on average by 3% in 4.5s through 7s. FNMA 7s showed sharp declines after temporarily spiking up in August. For example, the 2006 vintage slowed 50% and 2002s were 32% slower. Speeds in July surged due to changes in Fannie Mae's servicer guidelines that had become effective on June 1. The new guidelines allow for the removal of loans from their respective pools if they are delinquent for four straight months. Analysts from RBS Greenwich Capital said the strong slower suggests the most of delinquent loans were removed from the pools. As a result, analysts expect to see a strong bid on FNMA 7s. Credit Suisse estimates paydowns in August were $34.7 billion, down 2.3% from July's $35.6B. Net issuance is estimated at $40.4 billion, up from $37.8 billion previously. Broken out, net issuance of 30-year FNMA/FHLMC Gold was $39.6 billion and GNMA's was $4.5 billion, analysts from Credit Suisse said. The September prepayment reports should reflect a slowing of roughly 15% or so, largely as a result of a drop in day count to 19 days from 23 days. Speeds are seen rebounding in October as day count increases to 22 days. Additionally, there might be some pick up related to the recent rate rally.