The September prepayment reports brought relief after the August data encouraged fears of a potential refi wave in the making. 

Barclays Capital analysts had attributed the increase to spillover from the previous month. In July, speeds were slower than projected as originators were not prepared to deal with the refinancing activity pickup around mid-spring as mortgage rates moved below 5%. Ass a result of capacity constraints, lenders had to extend the time for processing loans. 

Speeds increased less than consensus expected – overall and by coupon and vintage. The 30-year FNMAs rose 4% versus a projection of 7%, while GNMAs declined 3% overall versus an anticipated unchanged print. 

The 30-year FHLMC Golds increased 6% with lower coupons more in line with expectations, while the higher coupons were less. The largest percentage gains, of course, were in 5s and 4.5s where the underlying borrowers are better able to take advantage of the historical record low rates to refinance their loans due to better FICOs and LTVs. 

Factors influencing speeds were an 18% jump on average in refinancing activity in response to a 13 basis points drop in mortgage rates to a 4.43% average in August, while the day count declined to 21 from 22. 

Overall, eMBS reported that FNMA MBS prepaid at 25.0 CPR in September, up 5.5% from August; FHLMC Golds at 28.0 CPR, up 8.6%; while GNMAs were essentially unchanged at 19.3 CPR versus 19.5 previously. 

Agency MBS gross issuance totaled $19.6 billion, paydowns $126.1 billion, leaving net issuance at over $3.5 billion. In terms of the Federal Reserve’s MBS holdings, BNP Paribas analysts estimated prepayments on the Fed’s portfolio at $27 billion.   

October Prepayment Outlook

Factors influencing October’s activity include a day count of 20 versus 21 in September and a decline in refinancing activity despite lower mortgage rates. 

The Mortgage Bankers Association’s Refinancing Index averaged 4430 in September, down over 5% from August’s average despite 30-year fixed mortgage rates averaging eight basis points lower to 4.35%. 

While there have been reports of some easing of capacity at mortgage lenders, a “bottleneck” is still evident, Barclays analysts said, as primary-secondary spreads remain relatively high.  Another factor keeping speeds depressed, Bank America Merrill Lynch noted, is credit pricing (loan level pricing adjustments or LLPAs) and consolidation in the lending industry. 

Based on this, speeds in October have been projected  to remain more or less flat overall. Updated forecasts will be forthcoming in the week ahead. 

November prepayments are projected to remain almost the same. However, the prospect of a second round of quantative easing being initiated in November is likely to pressure mortgage rates lower and thus lead to a pickup in refinancing activity. 

In fact, 30-year fixed mortgage rates set a new record low of 4.27% this week, according to Freddie Mac’s mortgage rate survey with the no-points rate also slipping below 4.5%. 

This gives the underlying borrowers of 4.5% coupons — which have strong FICOs and LTVs — a decent incentive for refinancing.

BNP Paribas analysts, however, pointed out that it is questionable whether lenders would ramp up capacity enough to deal with the refi flow, and that any increases are not likely to be rapid.

However, Credit Suisse  analysts noted that they expect some improvement in the closing lag. They said backlogs in origination pipelines were minimal heading into September and the staffing levels are better than they were earlier this year.     

As far as higher coupons go, their credit-impairment precludes them from refinancing unless through a new government program.  The odds of a bill passing at this time are seen as low. 

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