Despite rising interest rates, the number of subprime mortgage borrowers opting to refinance their mortgages increased in September, in one scenario by as much as 21.8% over the previous month, according to Michael Youngblood, head of ABS research at Friedman Billings Ramsey.
"Given the increase in mortgage rates and generally weaker seasonal factors, it is striking that there was a pickup in prepayments generally across all origination years," Youngblood stated last week in research.
Subprime mortgage rates on the month increased nine basis points for single-A minus credit borrowers; eight basis points for B credit borrowers and 22 basis points for C credit borrowers, according to FBR. Meanwhile, the Mortgage Bankers Association's Refinance Index marked a 2.77% decline, to 2,187.8 on Aug. 26 from 2,250.3 on July 29.
Either subprime borrowers can't resist lucrative offers such as the receipt of up to 52,500 NASCAR RacePoints - enough for a closet-full of racecar driver Tony Stewart firesuit jackets - being offered by New Century Financial Corp. subsidiary Home 123 in exchange for mortgage business, or lenders may have made a final market share push by prolonging teaser rates. According to JPMorgan Securities, despite 275 basis points of short-term interest rate hikes, the weighted average coupon of subprime ARMs had earlier this month barely moved from mid-2004 levels. Meanwhile, the fully indexed coupon rates on those mortgages within the same time period have climbed north of 10% from roughly 7%.
Across the board, fixed-rate and adjustable-rate subprime residential mortgage-backed securities originated from 2000 to 2005 saw an uptick in one-month prepayments in September, although fixed-rate mortgages generally showed a more dramatic increase.
Perhaps most markedly, prepayments of 2005 vintage fixed-rate subprime RMBS rose by 21.8% to a 27.4% CPR - following two months in a row that prepayment speeds on the vintage had declined, FBR's Youngblood found. Prepayments of the 2003 and 2004 fixed-rate vintages during the month rose by 9.90% to 43.1% CPR, and 13.1% to 38.8% CPR, respectively. Prepayments for 2005 vintage adjustable rate subprime RMBS increased by 11.9% to 30 CPR, while the 2003 and 2004 vintages posted 9.4% and 8.1% increases, respectively, to 55.7 CPR and 48.1 CPR.
Youngblood anticipates a relatively slight decline in prepayments in October, given the ongoing effect of rising mortgage interest rates and weaker seasonal factors. According to the MBA's weekly mortgage applications survey released last week, the seasonally-adjusted purchase index decreased by 7.4% to 466.4 from 503.9 the previous week, while the refinance index fell even further, decreasing by 8.5% to 1916.8 from 2095.7 the previous week.
Subprime MBS considered seriously delinquent showed flat or slightly better performance in the fixed-rate vintages from 2000 through 2004, but delinquencies increased everywhere else. For example, fixed- and adjustable-rate 2005 vintage subprime RMBS showed 20% and 20.5% delinquency rate increases, respectively, to 1.62% and 1%. Delinquencies in the adjustable-rate 2004 vintage increased by 10.69% to 3.21%, while the 2000 through 2003 vintages showed only slight increases. So far, delinquency rates seen on the 2005 vintages appear to be in-line with past performance of the 2003 and 2004 vintages.
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