Prepayment speeds for March came in faster than consensus estimates, with some people attributing the accelerations to higher day count for the month, while others point to the significant increase in January and February application activity.

"In general, we anticipated faster speeds, but we were surprised by the magnitude of the accelerations," noted UBS analysts, adding that many borrowers who were previously "fence sitters' waiting for another mortgage rate dip might have considered February's low mortgage rates as the last chance to refinance. Also, anecdotal evidence shows that servicers and brokers might be eliminating the last refis from their books.

Mortgage rates holding steady for the last several months probably induced some borrowers to walk away from, or let their rate locks expire believing that a similar deal would still be available to them. However, borrowers scheduled to close in March witnessed mortgage rates increasing by over 30 basis points on average since last locking in. Lehman Brothers said that the possibility of paying an added 30 basis points in annual interest gave these borrowers enough motivation to close on their existing applications. Lehman expects this "pullthrough rate" effect to play a role in April prepayments as analysts estimate that average borrowers scheduled to close in April have seen mortgage rates rise by 15 basis points and would more likely successfully close their applications.

UBS noted that day count increased four days from the March to the April report, which implies about a 15% higher prepay level. Meanwhile, the Mortgage Bankers Association Purchase Index increased about 19% month over month. Both resulted in the roughly 34% discount speeds rise. In terms of premiums, the MBA Refinance Index increasing about 18% provides a good explanation for the accelerated prepayments in these cohorts, UBS noted.

Meanwhile, analysts from Countrywide Securities initially suspected that the significant rise in refinance activity was because of technical factors, including day count. However, an examination of payoff data showed that the surge in prepayment speeds was mainly the result of the considerable increase in application volumes in late January and early February, with fast turnover speeds also playing a role, though to a lesser extent.

"An examination of Countrywide's payoff data suggests that the longer day count in March was not a driving factor in the pickup in speeds," according to Countrywide analysts. The firm's data showed that payoffs rose 20% from February to March on day one. Daily payoffs, however, in March were also higher versus February for days two through 11, implying a general rise in payoffs over the period, as opposed to merely being day-count related. March payoffs were not lower than February's level until the end of the month. Countrywide attributes this to the normal month-end behavior where payoffs typically rise in the last four business days of the month.

Countrywide explains that payoffs usually rise at the end of the month, as processors work to close loans within that month instead of letting them spill over into the following month. Thus the late-February pickup in payoffs was not out of the ordinary. Moreover, the payoffs in the last three March business days were 18% higher versus those processed in the last three business days in February, thus reinforcing the theory that there was a general pickup in activity and the spike in prepayments was not technically driven.

Strong purchase activity was also a marginal contributor to March speeds. Countrywide data implies that purchase activity has been quite strong by historical standards and has also contributed a few CPR points to overall prepayments speeds by driving robust housing turnover. Analysts added that their refinance transition data did not show any major changes in refinance behavior with nothing in the data implying a considerable change in activity in the last few months.

Increases in the March prepayment report will be short-lived, according to Countrywide analysts, with mortgage rates rising and the MBA Refinance Index recently dropping below 2000. Countrywide expects April speeds to drop roughly 20%, with most of the drop seen in newer-production current coupons, which are the most sensitive to changes in rates.

Separately, JPMorgan Securities noted that there are 1.5 fewer collection days in April, although seasonal turnover is 10% higher. Additionally, assuming lag time would be less than six weeks, the MBA Refinance Index suggests a 10% to 15% drop in refinance activity this month, analysts added. Thus they are expecting paydowns to be roughly $56 billion next month, decreasing about 15%. Meanwhile, discounts are expected to remain flat or to decrease marginally.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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