Prepayment speeds issued by Freddie Mac last week indicated that the housing market just may be starting to slow down.

During the spring, prepayment speeds generally pick up, but for the month of May, the reports were mixed, with discounts picking up much slower than history shows with premiums declining slightly.

Despite the modest changes, the report falls in line with many analysts' predictions. "We pointed out two months ago that after rather sharp speed increases in March and April, prepayments of Freddie Mac discounts would show only slight increases in May and June," said Warren Xia, a prepayment specialist at Banc of America Securities.

"With Freddie Mac speeds unable to build upon last month's increases, today's report suggests that housing activity is faltering slightly, and is certainly less strong than suggested by the Mortgage Bankers Association's Purchase Index," added John Vibert, a mortgage strategist at Credit Suisse First Boston.

Discount 30-year coupons - from 6s through 7s - increased by 3% to 4%. However, 7.5s and 8s slowed by the same amount. A good majority of the deep discounts were concentrated on new to moderately seasoned vintages, Vibert said.

Xia, though, indicated that speeds this time of year are generally modest. "Freddie Mac discount speeds typically increase by less than 5% between April and May due to the slight seasonal increase in home sales."

Premium coupons showed mixed speeds, with 30-year Gold 8.5s increasing by 4%, while 9s decreased by 9%. Vintage played a large factor in these numbers, with 1999 and 2000 production 8.5s increasing 20% and 16%, respectively. Seasoned 1994 8.5s decreased by 14%.

"With the 30-year no-point mortgage rate currently at 8.90% and housing turnover component peaking soon, premium speeds will decline significantly in July," said Xia.

Fannie Mae speeds are expected to be released this week, and Vibert has predicted that Fannie Mae discounts will increase 15% to 20%, after noting that Freddie Mac speeds were 5% to 15% higher than last month's Fannie Mae speeds.

As the market gears up for the summer months, prepayment speeds are likely to peak in June. "In fact, we expect the speeds of Freddie Mac discounts to increase by 10% next month," said Xia.

Vibert added that he expects premiums to fall significantly, particularly in 8.5s, where he expects them to fall by 20%. "Assuming that rates remain at current levels, the sharp increase in mortgage rates that began in early May should be fully reflected in refinancing activity by the June Fannie Mae report," he said.

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