April 9, 2007 / 4:27 PM / 11 years ago

Mortgage bond prepayments increase

NEW YORK (Reuters) - Prepayments on U.S. mortgage-backed securities increased in March due to a combination of higher volume of home loan refinancings, rising seasonal factors and three additional calendar days.

Prepayment speeds, however, increased less than Wall Street’s expectations as rising defaults on subprime loans spurred firmer lending standards.

Overall fixed-rate agency prepayment speeds rose by 15 percent in March, with paydowns increasing to $40 billion from $34.5 billion, JPMorgan said in a report issued late last week.

Net fixed-rate, mortgage-backed securities issuance was about $25 billion, the company said in a research report.

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.

The increase in prepayment speeds in March followed a February drop. February’s 8 percent decrease was primarily driven by two fewer calendar days, higher mortgage rates and slower seasonal activity.

However, mortgage rates dropped in March. Lower mortgage rates entices 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 6.16 percent in March, down from 6.29 percent in February. Rates on 15-year mortgages averaged 5.88 percent, down from February’s 6.02 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 9.4 percent, 9.2 percent and 8.8 percent, respectively.

Fannie Mae 30-year, 5.5 percent coupons created in 2003, 2004, 2005 and 2006 prepaid at CPRs of 11.9 percent, 12.7 percent, 11.9 percent and 7.8 percent, respectively.

Fannie Mae 30-year, 6.0 percent coupons created in 2003, 2004, 2005 and 2006 prepaid at CPRs of 15.3 percent, 16.7 percent, 17.5 percent and 12.3 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 $30 billion last month, the 15-year market declined by $5 billion, according to JPMorgan.

JPMorgan expects prepayment speeds in April to be flat. April seasonal turnover is typically 8 percent higher than March, but there are two fewer collection days during the month.

“As mortgage originators ratchet in lending standards and the housing market grinds slower, prepayment activity has slowed across the board,” JPMorgan said. “However, higher coupons are more influenced by both reduced cash-out activity and tighter lending standards.”

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