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Prepayment Rates Starting to Creep Up Again.
Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities recorded "modest gains" in September in coupons below 6.5% and "modest declines" in higher coupons, according to Bear Stearns.
Analyst Dale Westhoff said the speeds of new Fannie Mae 6.0% coupons increased by a constant prepayment rate of nearly 4 CPR, but that speed-ups in other coupons fell short of expectations.
Mr. Westhoff attributed this to "the significant flattening of the yield curve from April to August," which he said reduced the fixed-rate to adjustable-rate refinancing incentive by almost 25 basis points, and to limited news coverage of the recent decline in mortgage rates.
"The biggest surprise in today's numbers was the decline in prepayments in higher coupons in the face of a significant rally in mortgage rates," Mr. Westhoff said of the statistics for the September reporting period.
The analyst noted that 30-year mortgage rates have rallied almost 35 bps over the last two reporting periods with "very little" prepayment response. "Across the entire coupon spectrum, speeds today are lower than they were in June 2004, while mortgage rates are at least 20 bps lower than for the June reporting period," Mr. Westhoff reported.
Regarding the gap between Fannie Mae and Freddie Mac prepayment rates, the Bear Stearns analyst said Freddie Mac MBS speeds continue to lag behind Fannie Mae's. The "most notable" lag was in vintage 2003 6.0% coupons, he said, where Freddie Mac speeds fell 7.5 CPR short of Fannie Mae's.
Mr. Westhoff cited several factors that he said should cause Fannie MBS speeds to exceed Freddie's: a differential of 5 basis points in weighted average coupon, a larger ...
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Source: HighBeam Research, Prepayment Rates Starting to Creep Up Again.