Seasoned jumbos with 7.0% to 7.5% WAC will not provide prepayment protection relative to more recent cohorts - 2001 to 2002 cohorts - said a recent report by Lehman Brothers on non-agency prepayments.
Lehman stated that 1998 to 1999 cohorts are expected to prepay more aggressively than other vintages. This is a result of the recent increase in agency loan size limits, attractive 30-year hybrid refinancing opportunities, as well as minimal accumulated burnout.
In analyzing prepayments on 7.0% to 7.5% WAC jumbos, seasoned vintages have actually prepaid much faster than 2001 collateral despite the significantly lower loan sizes.
There are three main factors causing the fast prepayments in these cohorts, according to Steve Bergantino, co-author of Lehman's report.
The first one is seasoned jumbos with WACs in the 7.0% to 7.5% range have experienced very little burnout as they have had limited refinancing opportunities until recently. Added to this, the 1998-1999 and the 1993-1994 vintages have average loan sizes near or just below the current agency loan size limit (which is $300,700). Lehman noted this implies that borrowers in these cohorts can obtain an additional 25 basis points through refinancing into an agency mortgage. The third factor is the steep yield curve: seasoned borrowers now have attractive 15-year or hybrid refinancing opportunities.
Since none of these factors are expected to change over the near term, Lehman is expecting prepayments in these seasoned cohorts to remain high.
Aside from these findings, Lehman also noted that jumbos should prepay 20% to 25% CPR higher over the next three months than what is predicted for comparable agency collateral.
Analysts also noted that prepayments on new issue jumbo Alt-As should be roughly 10% CPR lower than jumbo prepayments. The report stated that 2002 origination jumbo Alt-A loans should prepay lower than 2002 jumbos. Furthermore, prepay penalty Alt-As should offer even more prepayment protection versus jumbos and non-penalty jumbo Alt-As.