UPDATE 1-U.S. mortgage bond prepayments decrease in May
(Adds Freddie Mac mortgage rates, Fannie Mae speeds, JPMorgan quotes, data, byline)
By Julie Haviv
NEW YORK, June 6 (Reuters) - Prepayments on U.S. mortgage-backed securities decreased in May from April levels as home loan refinancing activity dropped, according to figures from several Wall Street banks.
The drop in refinancing was a reflection of higher mortgage rates, the banks said in reports released late on Thursday and early Friday. The May figures also reflected the impact of continued deterioration in the housing market.
Prepayment speeds were mostly in line with to lower than Wall Street's expectations.
Overall fixed-rate agency prepayment speeds fell 20 percent in May, with the paydowns 17 percent lower at $46 billion, according to JPMorgan Chase.
Net fixed-rate, mortgage-backed securities issuance rose by $20 billion to about $70 billion, the company said in a research report.
The figures from JPMorgan were largely in line with data released from several other investment banks.
Prepayment speeds are key factors that investors use to determine the value of mortgage bonds. If prepayments rise or fall too quickly they hurt returns on mortgage securities.
The decrease in prepayment speeds in May followed a drop in April.
Mortgage rates were higher in May versus April but down from December. Lower mortgage rates usually encourage home loan refinancing which in turn boosts prepayment speeds.
Mortgage finance company Freddie Mac (FRE.N) said interest rates on U.S. 30-year mortgages averaged 6.04 percent in May, up from 5.92 percent in April. Rates on 15-year mortgages averaged 5.60 percent, up from April's 5.47 percent.
In December, interest rates on U.S. 30-year mortgages and 15-year mortgages averaged 6.10 percent and 5.75 percent, respectively.
Among actively traded issues, JPMorgan said Fannie Mae's (FNM.N) 30-year, 5 percent coupons created in 2003, 2004 and 2005 were prepaid at conditional prepayment rates, or CPRs, of 7.9 percent, 8.0 percent and 7.7 percent, respectively.
Fannie Mae 30-year, 5.5 percent coupons created in 2003, 2004, 2005, 2006 and 2007 prepaid at CPRs of 10.3 percent, 9.9 percent, 9.5 percent, 10.5 percent and 8.0 percent, respectively.
Fannie Mae 30-year, 6.0 percent coupons created in 2003, 2004, 2005, 2006 and 2007 prepaid at CPRs of 12.6 percent, 13.8 percent, 12.7 percent, 15.3 percent and 11.8 percent, respectively.
CPRs represent the percentages of outstanding mortgage principal that prepay in one year based on the loan principal prepaid in one month.
While the amount of outstanding 30-year MBS rose by $62 billion in May, which excludes interest-only mortgages, the 15-year market grew by $6 billion, according to JPMorgan.
Citigroup said it projects prepayment speeds to drop in June as higher mortgage rates further dampen refinancing activity, with the company projecting prepayment speeds to drop by roughly 5 percent.
A continued tightening of underwriting standards, combined with a possible further decline in home prices, may add to a slowdown in prepayment speeds, the company said.
Citigroup said it projects roughly 5 percent declines in prepayment speeds in both July and August.
JPMorgan, on the other hand, expects June prepayment speeds over May levels to increase marginally.
JPMorgan said its original projections suggest a decline in prepayment speeds due to higher mortgage rates, but the sharp drop off in prepayment speeds in May gives the company pause.
"So while June might be a blip in the long term trend lower, the coming months will redefine the historical benchmark for slow speeds," JPMorgan said. "Never before in the history of the mortgage market have so many borrowers been unable to sell their home at the price where they bought them, or as in the case in the many borrowers, owe more on their mortgages than their homes are worth." (Editing by Tom Hals)
