Mortgage Refinance ‘Wavelet’ Attracting Better-Credit Borrowers
July 08, 2010, 11:54 AM EDTBy Jody Shenn
July 8 (Bloomberg) -- Mortgage refinancing rose as home- loan rates began falling to record lows mostly among better- credit borrowers who took out loans in recent years at relatively low costs, bond prepayment reports show.
The constant prepayment rate, or CPR, for Fannie Mae’s 30- year fixed-rate securities with 4.5 percent coupons issued in 2008 jumped an estimated 24 percent from the previous month to 16.3 in June, after stripping out the effects of the Washington- based company’s purchases of delinquent loans from the bonds, JPMorgan Chase & Co. said, based on data released yesterday.
At the same time, the adjusted CPR, or the share of debt that would be retired in a year at the current pace, for 2007 bonds carrying 6.5 percent coupons, reflecting higher rates for their underlying loans, fell almost 12 percent to 12.5. The disparity underscores how borrowers most in need are among the least able to lower their financing costs after slumping property prices cut home equity and tightened lending standards.
“Today’s prepayment report signaled the arrival of the 2010 refi ‘wavelet,’” JPMorgan analysts led Brian Ye in New York wrote in report yesterday. “We use this term ‘wavelet’ because our overall theme of tame prepayments remains absolutely intact.”
For McLean, Virginia-based Freddie Mac’s 30-year securities, prepayment speeds on 4.5 percent bonds jumped 71 percent to 8.4 CPR, while those for 6.5 percent securities rose 2.6 percent to 24.1, according to data compiled by Bloomberg.
Average Rates
The average rate on a typical 30-year mortgage tumbled to a record low 4.57 percent in the week ended today, down from this year’s high of 5.21 percent in April, according to Freddie Mac. Rates averaged about 4.87 percent in May; loans usually close a month or two after applications.
Credit Suisse Group analysts said in a report that prepayment speeds among lower-coupon, more-recent securities were “slightly faster than our estimates,” while bonds with higher coupons prepaid slower than expected.
The data “underscores our arguments that any refi activity will be very narrowly focused,” supporting prices for higher- coupon bonds and slices of collateralized mortgage obligations created out of them such as interest-only securities, the New York-based analysts led by Mahesh Swaminathan wrote.
Aggregate prepayment speeds for Fannie Mae’s 30-year securities fell 37 percent to 17.5 CPR as the company’s buyouts of delinquent loans to reduce its expenses slowed, the JPMorgan data show. Speeds for similar bonds guaranteed by Freddie Mac, which eliminated earlier its backlog of repurchases of loans more than 120 days delinquent, rose 20 percent to 17.2 CPR.
Newer Issues
“The distribution of prepay increases by coupon and vintage was stark, with newer lower coupons bearing the brunt,” Anish Lohokare, head of mortgage-bond strategy in New York at BNP Paribas, wrote in a note to clients.
Loans from more recent years are expected to refinance more quickly because the homeowners qualified under tougher standards and haven’t seen their equity erased by the about 30 percent decline in home prices since their 2007 peak, according to an S&P/Case Shiller index. For example, the CPR for Freddie Mac’s 5 percent 30-year securities from 2009 almost doubled last month to 14.6 CPR, while speeds for similar 2007 securities climbed 23 percent to 20.5, according to BNP.
Borrowers with loans with higher rates may be “starting to show significant burnout after a year and half of elevated refi incentive,” as well as getting less attention from mortgage companies “given capacity constraints in the system” as those “lenders scrambled to close loans for prime borrowers (presumably prime borrowers with clean credit carry larger loans and may be less constrained to a single lender),” JPMorgan said.
Freddie Mac’s 6 percent and 6.5 percent securities “managed to eke out a small gain in speeds,” the JPMorgan analysts said. “This suggests that super premium speeds can still increase, however minuscule.”
--With assistance from Warren Xia in New York. Editors: Michael Weiss, Mitchell Martin
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
