February prepayments increased less than expectations of about 8% overall while speeds on FNMA discounts rose more than expected and higher coupons recorded smaller percentage increases than consensus anticipated.

Freddie Mac reported larger percentage increases compared to Fannie Mae and FHLMC speeds remain slightly slower than comparable FNMAs.

In GNMAs, speeds on 5.5s and lower prepaid faster than expectations while higher coupon speeds declined slightly from January levels. Speeds were anticipated to increase around 4% to 8% on the higher coupons. GNMA speeds, however, remain faster than conventional counterparts.

Bear Stearns senior managing director Dale Westhoff said that GNMA discount speeds are driven more by cash-out refinancing as well as other factors besides pure housing turnover. Westhoff expects they will not increase as much as conventionals on the seasonal pickup in housing turnover activity. This should lead to some convergence in the GNMA-FNMA speed differential over the next few months, Westhoff said.

According to Credit Suisse, paydowns totaled around $34 billion, up slightly from $33 billion in January. Net fixed rate issuance totaled $16 billion, down from nearly $27 billion.

JPMorgan Securities analysts added that the amount of 30-year agency MBS outstanding rose by $20.6 billion. They expect growth in 30-years to average about $20 billion per month this year, which could lead to over $200 billion in net growth for 2006. This would match the supply seen in 2000, they said.

Prepayment outlook

Over the next few months, prepayment speeds will probably be primarily influenced by the day count. Early Street estimates show March prepayment speeds surging over 25% in FNMAs.

The 30-year fixed mortgage rates averaged 10 basis points higher versus January - 6.25% versus 6.15% - which slightly reduced refinancing activity to an average of 1633 compared to 1666 in the previous month. Offsetting the decline in application activity, however, are four additional collection days in March, totaling 23.

In April, speeds are projected to slow around 8% as the day count declines to 19 days, then to pick back up in May - approximately 10% to 15% - as the number of collection days increases to 22.

Regarding the March report, Westhoff believes it "will serve to calibrate the market expectations for discount speeds through the summer months."

Some believe the seasonal slowdown in turnover, along with a weakening housing market, will significantly impact discount speeds. Westhoff, however, expects discount speeds will be faster than many expect. While he expects the housing market to slow down, it looks to be a gradual process that will be felt more in the second half of the year.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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