Prepayment Speeds Start to Creep Up Again.(Federal National Mortgage Association)(Federal Home Loan Mortgage Corp.)

The speeds of Fannie Mae and Freddie Mac mortgage-backed securities recorded only modest gains in August despite mortgage rates that were about 25 basis points lower than in the previous month.

Bear Stearns analyst Dale Westhoff said the speed gains were generally less than 10%, with the bigger percentage increases concentrated in the 5.0%-6.0% coupons.

The speeds of 2003 vintage Fannie Mae 5.0s increased by a constant prepayment rate of 0.9 CPR, while the prepayment rates of 5.5s rose by 1.3 CPR and those of 6.0s climbed 2.3 CPR, Bear Stearns reported.

"Above the 6.0% coupon prepayment increases were even more muted, with most increases less than 5%," Mr. Westhoff said.

He said the speeds for the August reporting period were slightly below the Bear Stearns projections, and that "most of the incremental refinancing produced by the 50 basis point drop in 30-year mortgage rates in July and August to 5.80% is expected to flow through to the September numbers."

Mr. Westhoff cited recent lows in the 10-year Treasury note yield, which he said "narrowly missed reaching our first key rate threshold" of 4.0%.

A 10-year Treasury yield below 4.0% would correspond to a 5.60% mortgage rate, he said, and would expose the 5.5% coupon (35% of the mortgage market) to refinancing pressure.