Prepayment Rates Slowing to Lowest Rate Since Mid-90s: 'This slowdown comes at what should be a seasonal peak in turnover activity (June/July) and before the full effect of the recent backup in mortgage rates.'.

Prepayment rates on 30-year fixed-rate mortgages in agency mortgage-backed securities fell 10% in July, and the Bear Stearns Prepayment Commentary has predicted that speeds will slow (on a rate-adjusted basis) to their lowest levels since the mid-1990s.

"Despite seasonal factors, the cooling housing market pushed discount speeds lower by 10%, while premium speeds reacted to the 30-bp increase in mortgage rates," said Bear Stearns analysts Dale Westhoff and V.S. Srinivasan.

Overall, 30-year Fannie Mae collateral recorded a constant prepayment rate of 9.7 CPR for the month, down 1.2 CPR from that of June, while the aggregate speed of 30-year Freddie Mac collateral stood at 9.3 CPR, down 1.0 CPR from that of the previous month.

"One of the biggest surprises in this month's report was the almost 40% increase in prepayments on the [Fannie Mae] 7.0% coupon," the Bear Stearns analysts declared.

Aggregate speeds on Fannie Mae 7.0s rose from 19.7 CPR in June to 27.6 CPR in July, while speeds on Freddie Mac 7.0s fell from 20.8 CPR to 20.2 CPR in July.

The analysts noted that Fannie Mae had said in an Aug. 3 news release that some MBS might experience higher prepayments beginning in August as a result of a recent clarification of servicing guidelines.

"As part of this update, [Fannie Mae] has automated the repurchase of delinquent loans in MBS pools that have missed four or more consecutive installments and have met the new servicing guidelines," they said. "Given the size of the anomalous prepayment numbers in this report, our guess is that the problem may be linked to the implementation of this new, ...