As mortgage rates fell in July, refinancing activity continued to pick up, leading to an increase in mortgage-backed securities prepayment speeds, Sarah Hu with the Royal Bank of Scotland (RBS) said Tuesday.

"Most of the speed increase was driven by lower coupons due to their large loan size, little burnout effect and high TPO concentration," wrote Hu.

She also noted that larger lenders have exited their wholesale businesses, causing them to see smaller increases in lower coupon speeds.

On lower coupons, servicers such as Citi (C), Flagstar and GMAC saw faster prepayment speeds. Meanwhile, Bank of America (BAC), Chase and Wells Fargo (WFC) prepaid slower on average when compared to other firms. Firms with correspondent and mortgage broker origination platforms were more likely to see faster prepayment speeds in the lower coupons. In addition, HARP volume is starting to level off, which is easing capacity constraints that may have pushed refinancing activity for credit worthy borrowers.

The conditional repayment rate on Fannie Mae's 30-year, MBS grew 9% from 26 CPR to 28 CPR. In addition, Freddie Mac's 30-year, MBS pre-payment speed rose 7% from 27 CPR to 29 CPR. The Ginnie Mae 1 prepayment speeds grew 22% from 20 CPR to 25 CPR while the segment analyzed known as Ginnie Mae 2 rose from 16 CPR to 18 CPR.

Hu said the change in speeds overall is in line with the RBS' short-term forecast of a 10% increase.

When looking at loans originated in 2011 and 2012, they possess "pristine credit quality," which reduces lender risk for put-backs in the future, Hu said.  

"As a result, FN-30 4s went up 36% for 2011 and 29% for 2010 but only increased less than 20% for 2009.  Moreover, seasoned paper (2002-2005 originations) continued providing call protection. FN-30 5.5% prepaid at 30 CPR  (conditional prepayment rate) for 2002-2005 originations, which was about 10 CPR slower than its 2006-2008 vintages where they prepaid more than 40 CPR."