Mortgage bond prepayments decrease in July

NEW YORK (Reuters) - Prepayments on U.S. mortgage-backed securities in July decreased from June 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 Wednesday and on Thursday. The July figures also reflected the impact of tighter lending standards and a continued deterioration in the housing market.

Prepayment speeds were mostly in line with Wall Street's expectations. The data is a key factor investors use to determine the value of mortgage bonds -- if prepayments rise or fall too quickly they hurt returns on mortgage securities.

Overall fixed-rate agency prepayment speeds fell by 11 percent in July, with the paydowns 9 percent lower at $38 billion, according to JPMorgan Chase.

Net fixed-rate, mortgage-backed securities issuance fell to about $40 billion while gross issuance remained relatively robust at $73 billion, the company said in a research report.

The figures from JPMorgan were largely in line with data released from several other investment banks.

The decrease in prepayment speeds in July followed June's 13-percent drop.

JPMorgan said despite seasonal factors, declining housing turnover activity and weak housing markets pushed discount speeds lower by 5 percent, while prepayment speeds on premium cohorts reacted to the increase of almost 25 basis points in mortgage rates. Higher mortgage rates discourage home loan refinancing, a key factor in prepayment speeds.

Mortgage finance company Freddie Mac (FRE.N) said interest rates on U.S. 30-year mortgages averaged 6.43 percent in July, up from 6.32 percent in June. Rates on 15-year mortgages averaged 5.97 percent, up from June's 5.91 percent.

Among actively traded issues, JPMorgan said, Fannie Mae (FNM.N) 30-year, 5 percent coupons created in 2003, 2004 and 2005 were prepaid at conditional prepayment rates, or CPRs, of 6.9 percent, 6.6 percent and 6.9 percent, respectively.

Fannie Mae 30-year, 5.5 percent coupons created in 2003, 2004, 2005, 2006 and 2007 prepaid at CPRs of 8.1 percent, 8.3 percent, 7.8 percent, 7.4 percent and 5.6 percent, respectively.

Fannie Mae 30-year, 6.0 percent coupons created in 2003, 2004, 2005, 2006 and 2007 prepaid at CPRs of 9.6 percent, 10.4 percent, 9.7 percent, 9.6 percent and 7.3 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 $38 billion in July, which excludes interest-only mortgages, the 15-year market grew by $2 billion, according to JPMorgan.

The amount of 30-year MBS brought the year-to-date growth figure to $352 billion, while the 15-year MBS market has grown by $7 billion year-to-date, the company said.

JPMorgan expects August prepayment speeds to be relatively unchanged over July levels, with one additional collection day largely offset by a 15 basis point increase in mortgage rates.

JPMorgan said a combination of factors will slow prepayment speeds for the rest of the year.

"Looking forward to the second half of the year, the combination of higher rates, tighter credit standards and downward spiraling home prices will continue to pressure speeds slower across the coupon stack," JPMorgan said. "Barring a major government refinancing initiative, prepayments are on schedule to reach new record lows by the end of the year."

(Reporting by Julie Haviv, Editing by Chizu Nomiyama)