The Agency prepayment report released today covering September speeds showed massive declines in the lowest coupons, said a report released by Bear Stearns. For example, 2003 FNMA 5.5s slowed 45% while 6.0s dropped 35%. In contrast, seasoned 6.0s through 7.0s slowed only by 5% to 20%, which is considerably less than expected. These figures suggest that the processing delay between new and seasoned MBS was quite significant in the last leg of the refinancing wave.
The prepayment report released this morning also indicated that September speeds seem to be driven by a Refinancing Index level of 4900 (from 7/11/03 to 8/8/03), said a JPMorgan Securities report. JPMorgan stated that a similar analysis would have shown that August speeds applied to a 7000 Index, suggesting roughly a 30% decline. Analysts added that the actual speeds were mostly in-line with their projections, although the 35% drop for low WALA 6s was somewhat surprising.
Bear said that today’s prepayment report also corresponds to a mortgage rate of over 6.25%, which is a level that should have pushed the 6.0% coupon completely out of the refinancing window. Analysts at the firm said that the contrast between leading indicators and actual reported speeds implies that the sharp sell-off in June pushed borrowers to lock-in rates in late June and early July.
The largest absolute and percentage drops in the 30-year sector was in the 5.5% and 6.0% coupons where the 2003 vintage dropped by 12 (5.5%) and 14 (6.0%) CPR, said Bear. These coupons ended up at 14 and 26 CPR, respectively. The 2002 vintage recorded the largest absolute declines with 5.5s slowing by 22 CPR (45%) to 26 CPR and 6s slowing by 18 CPR to 49 CPR. These coupons make up almost 50% of the 30-year sector.
Meanwhile, speeds for 15-yr FNMA dropped more compared to 30-yr FNMA on a percentage basis across the coupon spectrum and particularly in seasoned premium issues, said Bear. The speed outlier in the 15-yr sector is still the 1993 vintage, whose speeds have lagged less seasoned 15-yr cohorts by 15 to 20 CPR in the last several months (FN 15-yr 6.0% to 7.0% coupons).
Bear said that the processing lags that impacted conventional 30-years had a similar effect on the GNMA sector. Aside from the usual differences in lower-coupon speeds (new GNMA 5.5s were 5 CPR slower compared to their FNMA counterparts, while new GNMA 6.0s prepaid 11 CPR slower versus FNMA), the percentage slowdown in the higher reaches of the GNMA coupon stack were almost identical to levels seen in FNMA, which is generally in the low single digits.
However, in the 7.0% and 7.5% coupons, new GNMA issues still prepay an average of 4.3 CPR faster than similar FNMAs, while seasoned GNMAs are prepaying an average of 4.8 CPR slower than FNMA, said Bear. This trend has been happening with almost no exceptions in the past five months of the refi wave. Bear thinks that it is caused by servicer buyouts of relatively new FHA/VA loans that have gone delinquent. The apparent lack of buyout candidates in seasoned GNMA premiums may make them a good source of stable, burned-out prepayments post refi wave. They may even be potentially better versus newer premium GNMA issues, which may still be subject to servicer buyouts if they carry sufficiently high dollar prices.
JPMorgan said that Agency fixed-rate paydowns were roughly $120 billion. The 30-year agency MBS market rose for the second consecutive month. The amount of outstanding agency fixed-rate MBS increased by more than $67 billion; which is the biggest positive change in more than a year. Net supply should still increase in the next couple of months, with new production finally catching up with prepayments, said the firm.