Experts feel confident that the market has weathered the prepayments binge, but refinancings remain high, and even a small decline in mortgage interest rates could send prepayments soaring again.
For example, in a model used by Lehman Bros., a drop of 100 basis points would increase the Public Securities Association speed to 325 from 195 on a pool of Government National Mortgage Association 9% mortgage-backed securities.
The Federal Home Loan Mortgage Corporation reported that less than half its current volume is due to refinancings. That amount compares with two-thirds of its reported volume earlier this year.
The Mortgage Bankers Association mortgage loan application volume survey said refinancings for the week ended June 12 represented 35% of total applications, up two percentage points from the previous week.
The Freddie Mac estimate is based on a survey of 125 lenders, and the MBA numbers are based on a survey of 16 mortgage companies whose dollar volume for the period totaled $1.23 billion.
Prepayments still are running at a very high level, especially for mortgages with higher interest rates. Gregg N. Patruno, vice president of fixed income research at First Boston Corp., said the prepayment rate on a pool of 10.5% mortgages had been prepaying at 8% of the pool per month. Though that had been cut in half by the end of May, the normal rate is more like 2%.
Overall, Patruno was pleased at how the market handled the volume. Though the refinancing record was set in the 1986-87, the applications were spread over a greater length of time, he said. This time, the applications have been more concentrated. "Mortgage funding was recycled very efficiently by the market," he said.
The near future could provide a major test for a measurement of loan age introduced this year by Freddie Mac. The weighted average loan age reflects the weighted average of the number of months since the date of note origination for all the mortgages in a mortgage participation certificate pool.
Loan age is the principal factor in calculating prepayment speeds. The refinancing/prepayment flurry has changed the age composition of loan pools, and the weighted average loan age permits more accurate measurement of its pools.
Lehman Bros.' June prepayment report found that prepayment rates for all issuers were down substantially during the period of April 16 to May 15.
The Federal National Mortgage Association 9.5s declined the most, prepaying at 649% of the Public Securities Association model, down 178% of the PSA model during the month.
Under the basic PSA model, prepayment rates start at 0.2% in the first month and rise by that amount each month until the 30th month. After that, the prepayment rate is 6% annually for the remainder of the mortgage term. Thus, 649% PSA means that prepayments were 6.5 times as fast as the basic PSA model.
Freddie Mac prepayments fell 20%. but these are not comparable to Fannie Mae and Ginnie Mae results. The latter two peaked in March and Freddie Mac, in April.
The report said Fannie Mae and Ginnie Mae premium prepayments also dropped about 20% bringing total declines since March to 30%-35%. Lehman said it expects premium prepayments should continue to decline by another 25% over the next two months.