Speed Watch: Speeds Keep Rising, Especially for High Coupon Fannie Mae Deals.(mortgage banking industry)(Brief Article)

Prepayment rates for most agency mortgage-backed securities rose somewhat in the March reporting period, while the speeds of seasoned 30-year Fannie Mae super-premium issues soared.

Analysts at the Bear Stearns Prepayment Commentary attributed the dramatic rise in the speeds of 1991 and 1992 Fannie Mae 8.0%-9.0% coupons to the exercise of provisions enabling the government-sponsored enterprise to call pools when the pool factor falls below 10%.

"The key to this story is that in 1992 (Fannie Mae) agreed to exercise the call only when the factor reached 1% or less on post-1992 production," said analysts Dale Westhoff and Bruce Kramer. "Therefore, 1992 and earlier vintages with factors equal to or less than 10% and post-1992 vintages with factors equal to or less than 1% are vulnerable to the call."

The Fannie Mae provision has rarely been exercised, and therefore prepayment models have not incorporated the feature for valuation purposes, the analysts said, adding that "this must change."

They said Freddie Mac and Ginnie Mae pools do not have similar provisions. Freddie Mac does not permit its pools to be called, while Ginnie Mae allows certain pools to be called only with its consent and the consent of all holders of the outstanding securities related to the pool, according to the Bear Stearns analysts.

In fact, the speeds of 30-year seasoned Freddie Mac super-premium issues actually declined in the latest report as the comparable Fannie Mae speeds skyrocketed.

The constant prepayment rate for 1992 Freddie Mac 8.0s fell from 49.2 to 41.9, in contrast to the rise in comparable Fannie Maes from 43.9 CPR to 55.6 CPR, according to the Bear Stearns figures.