Prepayments were expected to decline 8% on 30-year FNMAs and by 26% on GNMAs. Factors contributing to these expectations were a lower number of collection days — 19 versus 22, while the Refinance Index was 10% lower on average in December from November.

Conventional prepayment speeds, however, slowed modestly more than predicted. 30-year FNMA MBS in our sample fell 13% overall. While aggregate speed declines on 5s and 5.5s were generally in line with expectations, 2008- 2006 vintage 6.5s and 7s were 10% to 6% slower, respectively, versus a projection of flat to increasing 16%. FHMLC Golds also slowed more than expected with relatively uniform percentage declines across coupons and vintages.

BNP Paribas analysts had warned that prepays could surprise to the downside as actual completion of loan modifications remains low and because banks might have been working to conserve capital into yearend and so were more active in completing originations and securitizations. 

Based on this report, it also appears that GSEs are proceeding in an orderly fashion in terms of buyouts related to loan modification so as not to disrupt the market. However, while the top line number masks this, Barclays Capital analysts pointed out that "buyouts are still live and kicking" as credit-impaired speeds remained high. At the same time, however, they didn't pick up from the last report.

GNMA speeds were anticipated to plunge as servicer buyouts related to delinquencies paused following an active two-months in November and December. Speeds indeed plummeted by a much larger than projected 42% on average in our sample.

Overall, the universe of FNMA MBS prepaid at 15.7 CPR in January compared to 18.5 CPR in December, a 15% decline, according to eMBS. FHLMC MBS fell 19% to 14.7 CPR; and GNMAs prepaid at 13.3, down 54% from the previous month. Conventional gross issuance totaled $66.4 billion, paydowns $66 billion, putting net issuance at $0.4 billion. GNMA gross issuance was $34.4 billion, paydowns $10.7 billion, with net issuance at $23.7 billion.

Looking ahead, speeds have been projected to slow 15% on 30-year Fannies and 6% on GNMAs. Factors influencing speeds include an unchanged day count of 19, while refinancing activity slipped 4% on average in January from December due to higher average mortgage rates. While higher coupons are anticipated to slow less than lower coupons due to Home Affordable Modification Program or HAMP-related buyouts, aggressive buyouts are not expected from the GSEs. An update on the prepayment outlook will be forthcoming in the next couple of weeks.

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