Freddie Data: Prepayment Speeds Continue to Decline
August 9, 1999
Last week's rise in mortgage rates will continue to dissipate refinancings, sources say, in line with a trend that started last year and is expected to continue going forward, especially for bonds with lower coupons.
Additionally, data released last week from Freddie Mac indicates that prepayments are going to continue their descent over the next few months, reflecting the declining seasonal trend in home sales and rising mortgage rates.
"There will be sharp declines for [coupons] of 7%, 7.5% and 8%, the ones most sensitive to interest rate changes," said Warren Xia, vice president and prepayment specialist at Banc of America Securities. "We're also likely to see [speeds of] super premiums - 8.5's, 9's, and 9.5's - to decline in a more gradual fashion."
Though prepayments have remained relatively constant over the last six months as mortgage rates rose sharply, speeds for 7% and 7.5% coupons are beginning to decline sharply, sources said.
However, the speed for 9% coupons has remained fast and constant, Xia noted, mainly due to lender solicitation, which is not likely to stop in the near future.
The aggregated speeds for 8.5% and 9% declined by only 4% and 3%, respectively, to a constant prepayment rate (CPR) of 35.8% and 38.4% CPR, respectively, Xia added.
"The reasons for the robust speeds are two-fold," Xia said. "First, the healthy housing market and large-home price appreciation in the last few years made it possible for some seasoned loans to have the first chance to refinance. Secondly, lender solicitation for those super-high premiums helped to keep the speed high."
According to Freddie Mac's data, prepayments for Freddie Mac Gold premiums continued to decline in July; speeds for newly originated pools declined more than those of seasoned pools as the refinance pipeline dried up.
Home sales activity, which drives the housing turn-over component, generally peaks before the start of the school year and declines further during the fall and winter months, Xia said.
For instance, the seasonality factor lowers the constant prepayment rate considerably, mainly because people are less likely to go house hunting during the winter months.
"There will be a 45% decline in these kind of speeds between what we saw this past June and February 2000," Xia noted. "Even though the overall level of housing turnover is high, that overall level is masked by a very strong seasonal pattern."
Though similar data from Fannie Mae and Ginnie Mae was not released by press time, sources predicted that premium speeds of those bonds were gong to decline by another 15% in August.
With the Fannie Mae 30-day, 30-year mortgage commitment rate currently at 7.83%, Xia expected the MBA refi index to decline to near 450 in coming weeks. This, in turn, will drive prepayments in September still lower.
"Pretty much, if rates stay here, 8% pass-throughs become nonrefinancible or very marginally refinancible," said Art Frank, head of mortgage research for Nomura Securities. "So the refinance universe becomes only 8.5's and higher, and that is quite a small universe."
The general rise in rates is also just one more factor making investors more reluctant to plunge in and make major additions to their mortgage portfolio, Frank said.
In fact, banks, which are the main bid for short-end collateralized mortgage obligations, have been willing to give up cash positions because every week they wait, they can buy something cheaper.
"Bank portfolios are more reluctant to commit new money to the mortgage market," Frank added.