Mortgage bond prepayments decrease in July

By Julie Haviv

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.