Analysts with Royal Bank of Scotland (RBS) found higher coupon mortgage bonds prepaid faster than expected in November due to a sharp jump in Bank of America (BAC)Home Affordable Refinancing Program refis, analyst Sarah Hu said.
The Federal Housing Finance Agency expanded the HARP program last fall to remove the loan-to-value ceiling of 125% — the so-called HARP 2.0 — and to reduce upfront fees and eliminate repurchase risk if the original servicer on the loan completes the workout. By June this year, it really started taking off.
Lower coupons – those with lower interest rates on the collateral – prepaid slower than previously forecasted by Hu.
“Meanwhile, Hurricane Sandy may have delayed some mortgage closings for cuspy coupon borrowers since 75% of East Coast mortgages are concentrated in coupons less than 5%,” Hu noted.
The prepayments on Fannie Mae 30-year, fixed-rate mortgages increased 12% to a 31 conditional prepayment rate, or CPR, in November. In addition, the prepayment rate for the 30-year, FRM Fannie Mae loans grew at a rate of 11% to 33 CPR from the previous month.
The Fannie Mae and Freddie Mac 15-year, fixed-rate mortgages saw their prepayment speeds jump to 24 CPR and 26 CPR in November.
The sharp jump in higher coupon refinances is tied to Bank of America’s sudden increase in HARP loan refinancings, Hu said.
“[W]e believe that perhaps Bank of America has recently increased their capacity and infrastructure so that they’re now able to help those borrowers.”
Prepayments on higher coupons of the 5.5% and 6.5% variety soared by 20%, which is above the 10% to 15% forecast, Hu said.
“Looking by servicers, BOA speeds surged 36% to 39 CPR for FN-30 5.5s and 44% to 34 CPR for FN-30 6s,” Hu wrote. “Excluding BOA pools, higher coupon speeds only increased by 15%, which is largely in line with the 16% day-count increase.”