By Isobel Kennedy

NEW YORK (MNI) – This week’s Mortgage Bankers Association data
release seems to signal that Agency mortgage-backed prepayments have
likely peaked and will slow in the future.

The MBA’s Refinace Index decreased 510 points or 15.3% to 2,834 in
the week ended November 25 while the seasonally adjusted Purchase Index
was only down 0.8%.

The Refinance share of mortgage activity fell to 73.9% from 75.8%
in the previous week. This is the lowest level of refinancing activity
since July 2011.

On a seasonally adjusted basis, the MBA’s Composite Index fell
11.7% in the week ended November 25.

Market sources expressed surprise at the deep drop in the Refinance
Index since 30-year mortgage rates have hovered in the 4.00% to 4.10%
over the last month.

Mortgage traders and strategists routinely use Bankrate.com for
mortgage levels as it is updated daily as opposed to other sources that
update only once a week or less.

Noting that the weekly Refinance Index has surprised the markets
with back-to-back drops, Janaki Rao, head of mortgage strategy at Morgan
Stanley, says “it could be signaling faster than expected burnout.”

In other words, anyone who was able to refinance at 4.00% has
probably already done so.

Wednesday’s data has implications for prepayment speeds for agency
MBS investors, including the New York Federal Reserve.

Prepayment data, which includes mortgage payoffs and refinancings,
is released by Fannie Mae and Freddie Mac on the fourth business day of
each month to inform investors in mortgage pools about incoming cash
flows from securities that will get paid off.

The New York Federal Reserve’s agency mortgage portfolio hovers
around $870 billion so it receives a fair share of mortgage prepayments
each month.

On September 21, 2011, the New York Fed said it would begin
reinvesting prepayments from its mortgage portfolio back into agency
MBS. Prior to that, the Fed was taking that money and putting it into
the U.S. Treasury market.

Prepayments from any mortgage portfolio vacillate monthly for a
wide variety of reasons like interest rates, 30-year mortgage rates,
credit conditions, consumer confidence, the employment situation.

For the 30-day period from November 14 to December 12, the NY Fed
said it expected its portfolio prepayments to be about $28 billion and
it uses that money to buy “to-be-announced” agency MBS in the secondary
market.

For the 30-day period October 14 to November 10, the Fed’s
prepayments were only $22 billion reflecting higher rates for 30-year
mortgages and therefore less cost benefits in refinancings.

Mortgage prepayment reports are due out next Tuesday and the Fed
will announce its estimated prepayments for the next 30-days on December
13.

Head of mortgage strategy at FTN Financial, Walter Schmidt, says
Wednesday’s drop in the Refinance Index makes it the lowest reading
since July when 30-year mortgage rates were closer to 4.50% and 4.60%.

But there will likely be a lag before the drop in refinancings
seeps into prepayment speeds.

“Since the previous peak 3,967 (Refinancing Index) occurred just
four weeks ago, the current elevated speed profile of the Agency MBS
market is essentially baked in for the next factor report due out next
Tuesday,” Schmidt said.

“But with a typical 6-8 week lag between refi applications and the
realization of prepayments in the monthly factor report, speeds should
start to abate rapidly in subsequent reports,” Schmidt added.

Agency mortgage-backed securities were tighter on the day vs.
Treasuries and the prospect of lower prepayments was a positive factor.

Both lower and higher coupon MBS were doing well Wednesday. Lower
prepayments means less current coupon supply gets sold into the market
and that helps the lower coupons.

Slower prepayments means the MBS with higher coupons have less of a
chance of getting called away from investors.

In addition to the slower prepays, MBS have seen very good buying
this week from real and fast money accounts who are seeking to get
returns that are more attractive than the Treasury market.

And, in times of stress, MBS also often see a form of
flight-to-quality buying.

** Market News International New York Newsroom: 212-669-6430 **

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