Monday, December 7, 2009

Fannie Prepays Plunge ‘Unexpected’ 6%: BarCap

Posted on the Housing Wire by Diana Golobay:

The prepayment rate among Fannie Mae 30-year notes slipped 6% “unexpectedly” after the government-sponsored entity (GSE) suspended buyouts related to the Home Affordable Modification Program (HAMP), according to monthly commentary by Barclays Capital.

The buyout delay in this month’s reporting period for Fannie indicates a spike in buyouts — and the prepayment speed — next month as mortgages are modified and withdrawn from mortgage-backed security (MBS) pools, according to researchers.

“Specifically, on November 24, [Fannie] told its servicers to suspend buying out loans that have made all trial payments but have not submitted all required documentation,” researchers said. “This servicing change abruptly reduced the number of loans that were bought out in November, leading to a sharp decline in the speeds of [Fannie] higher coupons and credit impaired pools.”

Prepayment speeds at brother GSE Freddie Mac (FRE: 1.09 0.00%), on the other hand, picked up across coupons and particularly in lower coupons. BarCap researchers found the difference between the GSEs’ two speeds traces back to the higher credit quality of Freddie pools, which react to lower mortgage rates more so than Fannie pools. Researchers also noted that Freddie buyouts never picked up in the first place, so a suspension of buyouts had less of an effect on prepay speeds.

“The latest report also provided an excellent benchmark with regard to how much buyouts have been driving speeds,” BarCap said. “For the month, driving rates were lower and refinancing activity should have gone up (which was borne out by the faster [Freddie] speeds). So the only reason for a drop in [Fannie] speeds was fewer buyouts.”

Fewer borrowers are refinancing than in recent years, despite record-low mortgage interest rates. Researchers attributed this trend in part to the migration of the mortgage universe into lower coupons. Tightened underwriting standards and “credit burnout” also contribute to the dwindling refinance response.

BarCap researchers said mortgage rates would have to fall 35bps below April lows (4.98%) before the industry sees any pickup in refinancing activity. Any risk of higher prepayment speeds in the short-term would therefore be the result of delinquency buyouts, rather than refinance, the researchers said.

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