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Mortgage Bonds Drop as Refinancings Outpace Forecasts

Mortgage bonds with U.S. government guarantees fell relative to Treasuries after data showed more homeowners with low interest rates refinancing than some analysts expected.

Fannie Mae-guaranteed home-loan securities with 5 percent coupons declined 0.2 cent on the dollar relative to Treasuries as of 5 p.m. in New York, the biggest drop of any Fannie Mae 30- year note, according to data compiled by Bloomberg.

“’Refi 2010’ began in earnest,” Brian Ye, an analyst at JPMorgan Chase & Co. in New York, said in a report yesterday on residential mortgage refinancing, or refis. “This report reinforces our view that the threat of a ‘conventional’ refi event is squarely aimed at the lower coupons.”

Homeowner refinancing is climbing amid the lowest mortgage rates on record. Since April, the pace of applications to refinance U.S. home loans has lingered around the highest since mid-2009, even as some consumers fail to qualify for new loans because home values have fallen and standards tightened.

The average rate on a 30-year, fixed-rate mortgage fell to a record low 4.32 percent last week, down from this year’s high of 5.21 percent in April, according to McLean, Virginia-based Freddie Mac.

Mortgage refinancing can hurt bondholders by returning the money they invested more quickly than anticipated.

Unexpected Jump

An unexpectedly large jump in mortgage prepayments among loans with already relatively low rates, especially those in originated in 2008 and early 2009, may partly reflects lenders using Fannie Mae and Freddie Mac programs intended to help borrowers with little or no home equity, Ye said in his report.

The programs, which allow mortgage lenders to skip some underwriting steps, are being used for more consumers than originally targeted, Ye said.

The so-called constant prepayment rate for Fannie Mae’s 30- year fixed-rate securities with 5 percent coupons jumped to a rate of 27 last month from 20, according to data released yesterday and compiled by Bloomberg. The bonds are tied to loans with average mortgage rates of about 5.5 percent.

The constant prepayment rate is the share of debt that would be retired in a year at the current pace.

Early mortgage repayments for Washington-based Fannie Mae’s bonds with 6.5 percent coupons rose to rate of 23 in August from 22 a month earlier. Those bonds are backed by loans on which homeowners originally agreed to pay about 7 percent interest.

More Expensive Mortgages

Even as prepayments on loans with lower rates surpassed forecasts, speeds for higher-rate mortgages were “mostly in line” or “slightly slower” than expected last month, Scott Buchta, head of investment strategy at New York-based Braver Stern Securities LLC, said in an e-mail.

Based on the data, prepayments on the Federal Reserve’s portfolio of mortgage-backed securities will total about $23.1 billion, up from $15.4 billion last month, Anish Lohokare, the head of mortgage-bond strategy in New York at BNP Paribas, wrote today in a note to clients. The amount will likely rise to $33 billion next month, he said.

The figures don’t include $1.5 billion of scheduled monthly principal repayments.

The Fed, which bought $1.25 trillion of securities tied to home loans from January 2009 through this March, said last month it would begin to reinvest proceeds from the holdings into Treasuries to bolster the economy.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

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