Mortgage market players seem to be expecting some fairly major slowdowns out of Freddie Mac's prepayment data, which will be released early this week.
"We're definitely expecting to see seasonal slowdowns," said John Vibert, a mortgage researcher at Credit Suisse First Boston. "But I don't think there is a tremendous amount of prepayment concern with the market backing up as it is. The real question is, what kind of slowdown will there be in the housing market?"
Home sales were slightly weaker last month, despite the fact that, from a historical standpoint, they are still considered very high for 1999.
"Somehow, though, it is very disconcerting for people to see this kind of slowdown in speeds or in home sales," Vibert added. "There should be 40% of a slowdown between now and February."
According to a study put out by prepayment analysts at PaineWebber Inc. , October's Fannie Mae and Ginnie Mae reports (covering prepayment activities for September) show that speeds slowed dramatically, with premiums down 20% to 25% and discounts down 10% to 20%.
"The Fannie Mae report can be described in one word: slow!," said Jonathan Raiff, PaineWebber's prepayment specialist. "Basically, speeds were down across the coupon curve. In discounts, 1993-production 6s, 6.5s, and 7s were down 28%, 19% and 28%, to [a constant prepayment rate of ]7.8, 9.6, and 11.0 CPR, respectively."
Current coupons posted the largest declines, with 7.5s and 8s down 22% and 26%, to 12.7 CPR and 17.2 CPR , respectively.
Additionally, refinancing activities remain low. According to the Mortgage Bankers Association, the refi index dropped less than 1%, to 412.2, for the week ending Oct. 8. It's four-week average wasn't far behind - down 1.1%, to 403.5.
According to the PaineWebber report, speeds on Ginnie Maes behaved much as did those on conventionals.
"With so much of the market at a discount, prepayment relationships from 1996-7 should become more dominant," the report said. "That is, seasoned GNMA discounts print in line with (or a touch faster than) conventional discounts, and new GNMA production will be slower than conventionals due to a longer seasoning ramp.
Mortgage passthroughs rose last week in line with Treasurys, as MBS players predicted that narrowing spreads will overtake the market due to the Federal Reserve's liberalizing actions in regard to its rule for borrowing from the Fed discount window.
The Fed announced that they will now accept certificates of deposit, deposit notes, commercial paper, mortgage-backed securities (both fixed-rate and adjustable-rate) and other debt instruments issued by banks or their affiliates, provided they carry investment-grade ratings.
Last week, the Fed also stated that it would include collateralized debt and loan obligations and commercial mortgage-backed securities for its discount window, giving a much-needed boost to the Y2K-wary mortgage market.
