FNMA prepayments were down just slightly more than expected in January. In particular, 5% coupon speeds were similar to expectations, while higher coupons slowed more than expected.
For example, 5.5s declined about 9% from December versus an anticipated slowing of less than 5%. Higher coupon speeds were expected to be unchanged to slightly higher, but slowed around 5%. Lehman Brothers analysts suggested that the slowing in premiums could be a result of borrowers having a delayed response to the November rally, which could, in part, be caused by less attractive refinancing options. The lack of more attractive refinance alternatives is driven by MTA rates gaining 100 basis points since last March.
Meanwhile, FHLMC Gold speeds recorded mostly larger percentage declines compared with those experienced by FNMA securities. GNMA speeds were expected to be essentially unchanged, but actually slowed about 9% on average.
Credit Suisse analysts estimated paydowns at $38 billion, similar to December. Net fixed rate issuance is around $21 billion with conventional issuance totaling nearly $27 billion. Meanwhile, GNMA issuance is at $1.5 billion while 15-year net issuance is at -$5 billion.
In terms of the upcoming February prepayment report, speeds are expected to slow further as a result of a lower day count - 19 compared with 21 days in January. This is despite the fact that refinancing activity was slightly higher on average - at 3% - as refinancings picked up from the traditional holiday slowdown.
JPMorgan Securities and Merrill Lynch analysts, however, predicted that speeds would be little changed from January as the lower day count is offset by better seasonals versus January. Speeds are expected to pick up sharply in March based on the increase in the number of collection days to 22 as well as strengthening seasonals.
Meanwhile, UBS is anticipating February speeds to drop 7% to10% from January levels. Analysts said in a report that primary mortgage rates, which are measured by the two-month rolling average of Freddie Mac 30-year no-point survey rate, dipped slightly. Aside from the two less business days mentioned above, UBS analysts also said the cold weather "has finally caught up with the seasoning cycle, and we expect the small up-tick in the seasonality factor to be minor."
Analysts stated that for 2006 production in 5.5s, 6s and 6.5s, they project speeds to remain the same from their January levels. They added that seasoned vintages should drop close to 10%, mainly as a result of day count.
The jump in day count in March along with the return of spring should increase prepayments by roughly 25%, analysts stated. Also, 2006 production would likely experience an even bigger increase in prepayments, even though the absolute level of speeds is still quite low.
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