Despite Higher Rates, Prepayment Speeds Still Accelerate in July Data.

Prepayment rates for agency mortgage-backed securities rose to "unprecedented heights" in the July reporting period, according to the Bear Stearns Prepayment Commentary.

The record speeds extended even to the lowest MBS coupons, and two vintages of 6.0% coupons surpassed constant prepayment rates of 80 CPR for both Fannie Mae and Freddie Mac securities, said analysts Dale Westhoff and Bruce Kramer.

Except for the most seasoned (1993) and least seasoned (2003) cohorts, all vintages of the 6.0% issues recorded speeds of over 70 CPR, they said.

Speeds of Freddie Mac MBS were consistently faster (by 2-5 CPR) than those of comparable Fannie Maes in every new to moderately seasoned vintage from 5.5s to 7.0s, the analysts noted.

"This is a continuation of the trend in GSE prepayments that we have observed and commented on throughout the current refinancing wave," Mr. Westhoff and Mr. Kramer said. "Nevertheless, with mortgage rates now over 100 basis points above their lows in June, we expect to see (Fannie Mae and Freddie Mac) speeds converge over the next four months."

Given the surge of mortgage rates in July and early August, the analysts said they expected prepayments to slow 50% to 80% for 5.5% to 7.0% coupons over the next four reports.

They said the refinancing exposure in the mortgage market had dropped from 96% to less than 40% over the previous eight weeks, and the average refi incentive had fallen from 145 basis points to less than 20 bps.