The August prepayment report showed speeds slowing for recent production 5.5s and 6s. Meanwhile, 6.5s and higher paid at essentially the same rates relative to August. There were only moderate dips in the recent production and scattered increases in more seasoned pools.
“Consistent with leading indicators going into the August reporting period, aggregate speeds posted substantial across-the-board declines at and below the 6.0% coupon level,” said a Bear Stearns report released this morning. “In contrast, 6.5% and higher coupons were flat to modestly faster in today’s report.”
Bear Stearns added that brand new cohorts in the 5.0% and 5.5% coupons experienced varying percentage declines starting between 25% and 35%, applying to both conventionals and GNMAs. The firm also noted that the average refinancing incentive for the 2003 conventional 5.5% coupon dropped to 40 basis points to 62 basis points between July and August. This has placed the cohort “at the very edge of the refinancing window,” Bear said.
In the meantime, in terms of 6.5% coupon and above, speeds in most cohorts were either flat or marginally higher. The absolute increases were in the range of 1 to 2 CPR (which is a rise of about 2% to 3%) over July speeds.
Bear said that in the August report, new issues (which comprises most of the outstanding MBS universe) behaved generally as the firm had expected. Analysts said that many borrowers backing seasoned premiums took advantage of their last best opportunity to refinance as rates started to climb in mid-June. This fencesitting kept speeds on most high-coupon seasoned cohorts slightly higher compared to expectations. Aside from this, the more time-consuming documentation requirements that often extend the refinancing process for seasoned mortgages relative to new ones, probably also contributed to the additional month of fast speeds on seasoned issues.
Bear said that despite some mild surprises in the super premiums in the August prepay report, everything points toward a sharp slowdown across all coupons and vintages in the September report. The firm also mentioned that while pipeline issues may still keep speeds on some older cohorts somewhat high, analysts think that the MBS universe will be entering its new prepayment regime beginning with next month’s prepay report.
JPMorgan Securities said that overall speeds are expected to slow by 20% to 25% in September. However, analysts expect a more significant drop to the 40% to 50% level at the cusp in the . Super premiums are predicted to dip by 10% to 15%.
In terms of Fannie Mae and Freddie Mac prepayments, Bear analysts said that FHLMC prepayments were systematically faster compared to FNMA although the gap narrowed slightly in the August prepayment report. Analysts expect this trend to continue, as they anticipate full convergence in FNMA and FHLMC speeds by the end of the year.