US mortgage bond prepayments fell in October

Prepayments on U.S. mortgage bonds decreased in October due to higher mortgage rates and a slowdown in housing turnover, Wall Street analysts said on Monday.

Overall fixed-rate agency prepayments fell 4 percent in October from September, with paydowns dropping from $53 billion to $52 billion, according to JP Morgan.

Net fixed-rate mortgage-backed securities issuance was approximately $20 billion, leaving year-to-date net issuance at $67 billion, the company said in a research report.

That was the highest pace of net 30-year supply since the fall of 2003, the company said.

Over the last three months, net supply has increased as borrowers refinanced from seasoned hybrid and fully indexed adjustable-rate mortgages to fixed-rate paper.

Prepayment speeds are key factors for investors to determine the value of mortgage bonds. If prepayments rise or fall too quickly, they hurt returns on mortgage securities.

Mortgage finance company Freddie Mac (FRE.N: Quote, Profile, Research) said interest rates on U.S. 30-year mortgages averaged 6.07 percent in October, up from 5.77 percent in September. Rates on 15-year mortgages averaged 5.63 percent. up from September's 5.36 percent.

Most speed changes were in single digits in percentage terms across the MBS coupon stack, according to Credit Suisse First Boston.

Given the lack of surprise in the speeds and the fact that institutional factors have been driving mortgage performance lately, the company expects the report to have limited impact on the MBS sector.

However, the report represents an eventual positive for the MBS sector when paydowns are reinvested, the company noted in a research report.

The October prepayment levels on MBS guaranteed by Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac were mostly in line with what Wall Street analysts had expected.

Among actively traded issues, JP Morgan said, 30-year 5 percent coupon Fannie Mae MBS created in 2003 and 2004 were prepaid at conditional prepayment rates, or CPRs, of 14.8 percent and 12.8 percent, respectively.

Fannie Mae 30-year 5.5 percent coupons created in 2003 and 2004 prepaid at CPRs of 20.1 percent and 18.7 percent, respectively.

Fannie Mae 30-year 6.0 percent coupons created in 2003 and 2004 prepaid at CPRs of 29.5 percent and 29.8 percent, respectively.

CPRs represent the percentages of outstanding mortgage principal that prepay in one year based on the loan principal prepaid in one month.

Speeds on 15-year coupons generally exhibited similar percentages declines to their 30-year counterparts, Credit Suisse First Boston said.

While the amount of outstanding 30-year MBS rose last month, the 15-year market declined by $4 billion, according to JP Morgan.

Year-to-date, the 15-year market has declined by $51 billion, while the 30-year market increased by $116 billion so far this year, the company said.

Speeds on Ginnie Mae MBS slowed more than Fannie Mae and Freddie Mac conventional issues, according to Citigroup research.

If refinancing activity continues to trend lower, the company expects to see slightly smaller drops in November speeds for Ginnie Mae MBS, the company said in a research report.

Mortgage originators prefer to go after larger, more profitable, easier-to-process conventional loans when refinancing activity is high. But that leads to a greater drop in conventional speeds when it decreases, Citigroup said.

Analysts' expectations for November's prepayment speeds are for a 15 percent decrease from October. The slowing is due to a slowdown in housing turnover, lower refinancing activity and a two-day drop in collection days.

JP Morgan forecasts paydowns at $44 billion in November and net supply at $18 billion.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.