Analysts Anticipate Higher Prepayment Activity for May.(beliefs, opinions and attitudes of financial analysts about mortgages)

Analysts were predicting an increase in May prepayment rates for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities, citing a higher number of business days and seasonal housing turnover.

In the Mortgage Strategist, UBS analysts were forecasting that speeds would rise about 7%-10% in May. (This column was written before the release of agency prepayment rates for May.)

"Speeds on discount coupons should rise slightly more than 7%-10%, while premium coupons will increase less (seasonality has little impact on premium speeds)," the UBS analysts said. "New premium coupons backed by alt-A mortgages could continue to prepay slower than usual, due to tighter underwriting guides and limited [home price appreciation]."

Analysts at Bear Stearns & Co. were also projecting faster MBS speeds in May, though they foresaw a less robust 5%-7% increase.

"Against a backdrop of continued weakness in the housing sector and tighter lending standards, we expect prepayment speeds to remain significantly slower than the 2006 experience," the Bear Stearns analysts wrote in the May 7 Prepayment Commentary. "Controlled for seasoning and relative coupons, prepayments in 2007 are already running 20% slower than in 2006. This trend will likely intensify as the new, more conservative underwriting standards are fully absorbed by the market."

Meanwhile, Credit Suisse published an analysis of reduced-servicing mortgage pools, arguing that pools with a smaller proportion of third-party-originated loans are more appealing to investors because they offer an attractive "prepayment profile."

Such pools experience slower prepayment speeds than to-be-announced coupons, and have comparable (or slightly slower) prepayment records than TBA pools even after adjusting for loan balance, age and rate incentives, according to Credit Suisse analysts.