Agency mortgage-backed securities prepayments continued their downward spiral, propelled by rising mortgage rates and a shorter calendar month, analysts claim.
Overall, prepayments were largely in line with the expected short-term forecast in June, which called for a 10% decrease, according to report from Royal Bank of Scotland.
For instance, Freddie Mac 30-year conventional prepayments decreased to a 25 conditional prepayment rate (CPR), falling 9% while the Fannie Mae 30-year conventional prepayments also dropped to a 26 conditional prepayment rate, declining 8%.
Additionally, Ginnie Mae I 30-year conventional prepayments fell to 24 CPR, dropping 13% and Ginnie Mae II 30-year conventional prepayments declined to 18 CPR, down 12%.
The fall in prepayments is expected to continue well into July, plunging by 20% based on the steep rise in mortgage rates since May after the Federal Reserve signaled that it could soon start to reduce its bond-buying program, explained agency MBS analysts Sarah Hu and Ashley Gam of RBS (RBS).
However, the 10% increase in day count from June to July may somewhat counterbalance the impact of rising rates, the RBS analysts explained.
The drop in prepayment speeds was led by 3 coupons and 3.5 coupons, which have significantly moved out of the refinance window with mortgage rates rising above 3.5% in May.
Due to Home Affordable Refinance Program refis, higher coupons – 5 coupons and above — exhibited a smaller decline of 5% than suggested by the lower day-count of 10%.
Meanwhile, post-HARP originations displayed a higher sensitivity to the rate increase than pre-HARP originations, posting a larger decline in speeds.
For instance, Freddie Mac 3.5 coupons fell 13%, 10% and 10% for 2012 through 2010, respectively.
By contract, prepayments on pre-HARP high coupons declined by less than 5%, RBS noted.
Among specified collateral types, high loan-to-value ratios and loan balance paper continued to prepay slower than the generic cohorts. Additionally, loan balance pools continue to provide better prepayment protection than the average cohorts, though to a lesser degree than high LTV pools, according to RBS.
"It should be noted that the prepayment protection of these specified pools are becoming weaker as rates continue to rise," Hu and Gam concluded.