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Prepayment Speeds Show Signs of Life in Streamlined Refis

Prepayment speeds among mortgage-backed securities (MBS) indicate that, although some lenders facing an influx of refinance interest may lack the infrastructure to manage all the requests, streamlined refinance programs have picked up since their implementation. Bank of America-Merrill Lynch researchers noted late last week that aggregate 30-year fixed-rate MBS prepayment speeds declined 5% in June to 22.9% conditional prepayment rate (CPR), likely due to capacity constraints among lenders offering refinancings. "We have been highlighting that capacity constraints have been one of the most important drivers of speeds and the recent prepay data seems to further support this claim, with 30-year Fannies consistently prepaying between 22% CPR and 24% CPR over the last four months, even though the refi index moved in a wide range." Prepays on 6s and 6.5s increased despite lower speeds among 5s and 5.5s, however, indicating the streamlined refi program might be picking up overall, according to the researchers. The researchers concluded that streamlined refinance programs seem to impact Freddie Mac (FRE) prepays more than Fannie Mae (FNM), with speeds on '06-'07 Gold 6s increasing more than speeds on Fannie 6s. "We think that this happened as Fannie was imposing [loan-level price adjustments] LLPAs on streamline refis, thus reducing the refi incentive for Fannie 6s borrowers versus Gold 6s borrowers." The report warned against undue optimism on refi popularity to continue driving prepayments, noting the Freddie Mac Survey Rate hovered between 4.8% and 4.9% in May before selling off in June. The refi index has trended downward since April, indicating a decline in refi activity in coming weeks. As a result, the researchers said they expect prepays to be flat to 15% lower next month. "We think that in spite of the decline in refi applications, capacity constraints will continue be a major driver of prepays in the short term and as a result, speeds will be fairly sticky till the outstanding mortgage applications are cleared up," researchers said. "The backlog of applications should offset most of the decline in the refi index that we saw in April and May. Further, the recent prepay data is suggesting that streamline refi activity may finally be picking up, thus increasing the likelihood of borrowers being approved for refinancings." Write to Diana Golobay.

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