June Data Shows Accelerating Prepayment Speeds after Lull in May.

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities surged in June for recently originated 30-year 5.5% coupons, following a May report that had been termed "the calm before the storm."

Speeds for Fannie Mae '03 vintage 5.5s jumped from a constant prepayment rate of 7.2 CPR to 20.8 CPR in June, while speeds for the '02 vintage soared from 18.6 CPR to 42.4 CPR, a record increase, according to the Bear Stearns Prepayment Commentary.

"This was clearly the 'sweet spot' of the refinancing pipeline, as these borrowers were the easiest and most lucrative to refinance," said analysts Dale Westhoff and Bruce Kramer.

The analysts said the "most notable aspect" of the June report was the divergence in response between lower coupons (6.0% and lower) and higher coupons (6.5% and higher).

"The lower coupons, especially the 5.5s, saw a spectacular jump in speeds based on a first-time opportunity to efinance," they said. ". Since today's report corresponds to a mortgage rate of approximately 5.5% and a (Mortgage Bankers Association of America) Refinancing Index of between 7500 and 8000, we expect to see additional increases develop in next month's report in response to a record low in mortgage rates of 5.25% and a 10000 peak in the Refinancing Index."

In the previous prepayment report, the speeds for most cohorts of Fannie Mae 30-year MBS slowed somewhat in a prelude to the surge in June.

"In percentage terms, no single cohort of significant size slowed by more than 6%," said Messrs. Westhoff and Kramer. "Given the degree of volatility in speeds, and given our expectations for the next record leg of this refinancing wave, (the May) report should probably be thought of as 'the calm before the storm.'"