'Extension Theme' Suggests Prepays Will Slow.(Speed Watch)

Prepayment rates for mortgage-backed securities fell 10.5% overall in July from a constant prepayment rate of 11.9 CPR to 10.7 CPR, according to Credit Suisse.

Credit Suisse researchers Mahesh Swaminathan and Mukul Chhabra, writing in the July 2008 Fixed Rate Prepayment Commentary, reported that the speeds of 30-year 2007 5.5% coupons slowed by 1 CPR, while 6.0% and 6.5% coupons declined 2 CPR.

The Credit Suisse analysts also reported that the estimated net issuance of fixed-rate MBS plunged from $60.4 billion in June to $35.8 billion, a decline of 40.8%.

The estimated net issuance of 30-year Fannie Mae and Freddie Mac MBS fell from $39.6 billion to $19.8 billion, while estimated issuance of 30-year Ginnie Mae securities declined from $20 billion to $18.7 billion, the authors said.

"The extension theme is reinforced, with diminishing prepayment activity likely to continue for the rest of this year," the Credit Suisse analysts said. "Speeds across the coupon stack are likely to compress if rates grind higher."

For example, they said, the speeds of Fannie Mae 30-year 5.5% coupons "could very well" fall from 4.4 CPR in July to 3 CPR over the winter.

In other prepayment-related news, Barclays Capital observed in the Aug. 25 issue of US MBS Strategy that discount speeds "have yet to feel the full impact of weak housing" because mortgage rates have been relatively low in the past year, but added that this is likely to change.