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Waived Fees a Boon to Refi Activity

Waived Fees a Boon to Refi ActivityAnnaly Capital issues monthly commentary

March 10, 2009

By staff

Government policy will have less of an impact on prepayment speeds than expected, based on projections from one investment firm. But waived guarantee fees on conforming refinances will likely push prepayment speeds higher.Last month’s prepayment speeds were faster than during January, according to the February monthly commentary released today from Annaly Capital Management Inc.

Aggregate 30-year Fannie Mae prepayment speed rose to a constant prepayment rate of 23.1 percent in February from 17.2 percent the prior month. Average prepayment speeds on “30 year Fannie Mae 6.5s and 7s were slower on average than 5s through 6s” probably because of impaired credit profiles for higher coupon borrowers.

Most dealers forecast a moderate uptick in prepayment speeds as a result of “increased day count” as well as increased seasonality “with perhaps a more dramatic increase by May or June” as mortgage insurers relax requirements and LTV guidelines, Annaly said.

But a minority of dealers predict a 10 percent to 20 percent decline in speeds next month “due to the back-up in mortgage rates in late January and February. Borrowers may be waiting for a better entry point.”

The mortgage investment firm said prepayment speeds are being closely monitored to determine the impact from recent government mortgage programs that were designed to stimulate refinance activity.

While prepayment speeds are impacted by mortgage rate movements and credit factors in the short term, the success of the Homeowner Affordability and Stability Plan — which was detailed by the U.S. Department of the Treasury last week — will determine the long-term changes in the marginal prepayment, the report indicated.

But Annaly isn’t optimistic about the plan’s prospects.

“The program will likely fall short of the hoped-for results and that prepayment speeds will therefore come in more slowly than expectations based solely on rate-related refinanceability,” the statement said.

Annaly cited the industry’s strained administrative capacity and credit availability among the culprits of its pessimistic outlook. In addition, borrower documentation, borrower credit history and little opportunity for equity withdrawal were also mentioned.

Annaly was previously concerned about guarantee fees on conforming loans, but an announcement from Freddie Mac that it would waive loan level pricing adjustments for borrowers with lower FICO scores and higher loan-to-value eased its concerns. Freddie also removed the obligation of sellers to provide representations and warranties on the fair market value of the loan security.

“These changes, which we assume Fannie Mae will have to match in the weeks ahead, will reduce some of the frictions that would otherwise reduce prepayment speeds,” the forecast said. “These changes notwithstanding, we believe that the market will see some sustained increase in speeds but not the type of peak speeds witnessed in the 2003 refinancing boom.”

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