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Street Analyzes September Prepays

Fannie Mae and Ginnie Mae last week announced their prepayment figures for the month of September, which, for the most part, fell in line with expectations.

Both groups posted significant declines in both premium and discount pools, as higher mortgage rates - some of the highest rates seen in months - were largely responsible for these large declines.

The overall speeds for Fannie Mae 30-year 7.5%, 8% and 8.5% pools declined, while those of Freddie Mac declined by 15 to 19 percent. Similarly, Ginnie Mae's 8's fell 19%, and 7.5's fell 23 percent.

The September results mark the third consecutive month that premium coupons have declined, making most premium coupons worthwhile to carry, said Warren Xia, vice president and senior analyst at Banc of America Securities.

However, in the discount markets, Ginnie Mae 6s and 6.5s fell 13% and 14%, respectively, compared with Fannie Mae's declines of 26.5% and 19.4%, respectively.

"This pattern is somewhat surprising because Ginnie Mae borrowers have historically shown a more pronounced seasonal pattern than conventional borrowers," said John Vibert, a mortgage researcher for Credit Suisse First Boston.

Expectations were that Fannie Mae discounts would only decrease 15%, based on a normal slowdown in home purchases. Much of these declines are attributed to one less business day in the September reporting period.

Fifteen-year Fannie Mae prepayments also declined, but less than 30-years in both the premium and discount sectors.

The outlook for October prepayments indicates a moderate decline in premium speeds, with Freddie Mac expecting to decline more than those of Fannie Mae, observers said.

"Assuming that mortgage rates remain at their current levels, prepayments over the next five months are expected to slow down by 25% to 30%," explained Xia.

A downward seasonal trend in housing turnover, as well as weakening home sales, a refinancing slowdown and the upcoming holiday season, will contribute to the continued decline in the coming months, analysts said.

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