Prepayment speeds slowed less than expected in September . For example, 30-year FNMAs and GNMAs were projected to decline 11-12% in IFR Markets' sample with a four day lower day count a major factor; however, speeds slowed just 9% on FNMAs and 6% on GNMAs.

 

The reasons being cited are a longer lag time involved in closing loans as refi activity jumped in mid-summer in response to record low mortgage rates at the time, and particularly increased originator capacity. In June and July, the Refi Index averaged around 5100 for both months, up from 4255 in May as mortgage rates declined from a 3.80% average to 3.55% in July.

 

Meanwhile, there are signs that mortgage lenders are adding capacity. Morgan Stanley analysts pointed out in research earlier this week that data from the Bureau of Labor Statistics (BLS) showed an 18% increase in loan employment in the first half of this year. They added that between the Fed's commitment to keep mortgage rates low into 2015 along with the FHFA's continued work on issues keeping credit standards extremely tight, like the rep & warranty putback risk, bankers could become more comfortable in increasing capacity.

 

An added incentive for lenders to increase capacity is the record high level of profitability in the origination process, noted Citigroup. The surge in the gain-on-sale is a strong incentive for lenders to add capacity so they can target non-HARP borrowers, they added, warning "This could lead to faster prepayments on these pools going forward."

In regards to HARP coupons, speeds were noted to be uniformly slower across servicers. J.P. Morgan said that adjusted for day-count, premium speeds appear to have peaked; however, CPRs are seen as remaining elevated over the near term.

 

Whether speeds will begin to show burnout is uncertain at this time given the new framework in regards to reps & warranty announced by the FHFA in mid-September and which becomes effective on January 1, 2013. "The objective of the new framework is to clarify lenders' repurchase exposure and liability on future deliveries. Under this framework, lenders will be relieved of certain repurchase obligations for loans that meet specific payment requirements," said Acting Director Edward DeMarco. The changes are also seen as making it less risky to do cross-servicer refis.

 

At the time of the announcement, Credit Suisse said HARP volumes could possibly slow in the very term given the effective date of January 1, 2013. In general, however, the changes were not seen as having too much of an impact on Chase and Wells activity since they've been very aggressive in HARP refinancings, but it could potentially increase activity on BoA borrowers. Meanwhile, Citi analysts projected prepays for HARP eligible BoA loans could increase by 5-7 CPR based on the changes.

 

As for GNMAs and the FHA-HARP impact, speeds on the 4.5% 2009 vintage slowed 13% but at a 33 CPR it is still substantially faster than the 2010 cohort which prepaid at 20 CPR. The story is similar in 2009 5.0s which declined 9% to 29 CPR but is also much faster than the 2010 cohort's speed of 18.

 

Meanwhile, BoA buyout activity does not appear to have been too much of a story in this report, although it appears 6.0% may have been a target as speeds averaged 30.3 CPR in September versus 24.3 in August, and to a lesser extent 5.5s as they held steady in the high 40s. Credit Suisse previously observed that BoA has not been particularly aggressive despite its serious delinquency rate hovering the 5% threshold for requiring buyouts which suggests to them that balance sheet/regulatory issues are preventing the bank from doing large scale buy outs. They think this could remain in place for some time.

 

Overall, eMBS reported speeds on FNMA MBS fell 11% to 26.4 CPR in September from 29.6; FHLMC was down 8.6% to 27.8 from 30.4, while GNMAs lowered 8% to 21.1 from 22.9. Gross issuance totaled $149 billion, while paydowns were $132.7 billion which resulted in net issuance of +$16.3 billion.

 

Looking ahead to October, speeds had been projected to increase around 5% as the number of collection days increased to 22 from 19; however, upward revisions are likely given the sharp jump in refi applications as a result of new historic lows in mortgage rates following the FOMC's QE3 action. Since mid-September, the MBA's Refi Index has jumped 24% to 5888, its highest level since April 2009 as mortgage rates dropped to 3.40% from 3.55%. And yesterday, Freddie Mac reported a new low of 3.36% on the 30-year fixed rate mortgage rate which suggests a further pickup in refi applications for this week. Coupons seen most impacted by this are 3.5% and 4.0%s.

 

J.P. Morgan said given the surge in the index and increasing capacity at the mortgage bankers, they think speeds over the near term on the lower coupons could reach about 10% higher from their recent August peaks. Credit Suisse projects that at a 3.25% mortgage rate, the 2011 vintage FN 3.5s speed could hit the high 30s to 40 CPR in coming months. Near term speeds (October and November) are also likely to be impacted by a rush from servicers to close loans before an increase in g-fees takes effect on December 1.

 

 

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