The October FNMA prepayment report - reflecting September activity - showed overall speeds were down 18% and 30-year FNMA discounts slowed significantly by more than 20%. The 15-year sector showed comparatively less declines, with 2003 15-year 4.5s and 2003 FNMA 5s almost converging.

As mentioned, the decelerating speeds exceeded expectations, as previously, Street consensus was projecting only a general slowing of 13% to 15%. Specifically, 2003 FNMA 5.5s were down 21% to 21.3 CPR from 26.1 CPR and 2004 FNMA 6s were down 23% to 29.2 CPR from 36.3 CPR. Also, ARM prepayments were down sharply as well. For instance, 2004 FNMA 3/1s declined 15% to 32.8 CPR from 37.4 CPR.

The considerable drop in speeds was attributed to the two fewer September business days relative to August. There is also the aspect of higher rates. September speeds were driven by mortgage rates between mid-July and mid-August when the 30-year FNMA current coupon averaged 5.38%. By contrast, August speeds were based on mortgage rates between mid-June and mid-July when the 30-year FNMA current coupon averaged 5.11%.

Before the reports came out, JPMorgan Securities analysts were expecting an 18% to 20% drop in September prepayments. Aside from factors already mentioned above, analysts cited the Mortgage Bankers Association's Refinance Index implying a 7% drop and seasonal turnover decreasing by 10%, adding that agency fixed-rate paydowns were projected to be $55 billion.

For the November report (reflecting October activity), the downward trend is expected to continue. The MBA Refinance Index suggests an additional 5% to 7% drop in speeds, JPMorgan researchers report. Furthermore, seasonal turnover is traditionally 10% less in November relative to October, causing paydowns to drop to $50 billion. On a separate note, Credit Suisse First Boston analysts are expecting November prepayments to dip about 7% to 11% from October.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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