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Neediest Mortgage Borrowers Left Behind, Prepayment Data Show

U.S. Treasury Secretary Timothy Geithner
U.S. treasury secretary Timothy Geithner. Photographer: Tomohiro Ohsumi/Bloomberg

Refinancing of Fannie Mae and Freddie Mac mortgages with the lowest interest rates soared as prepayments on loans with the highest rates declined, underscoring how only some homeowners can take advantage of the best borrowing costs on record.

The so-called constant prepayment rate, or CPR, for 30-year Fannie Mae securities with 4 percent coupons, backed by loans with rates of about 4.5 percent, jumped 140 percent last month to 17.7, according to data released late yesterday. Speeds for similar bonds with underlying loan rates averaging about 7 percent fell almost 10 percent to 19.2.

Treasury Secretary Timothy F. Geithner told lawmakers yesterday the U.S. would “move forward with a plan in the next couple of weeks” to allow more refinancing of government-backed loans for borrowers who owe more than their home’s values. Prepayment speeds last month on the lowest-rate debt show lenders may be concentrating on the safer homeowners who got loans since the housing slump slowed in 2009.

“This report underscores the trend that lenders have learned to cope with capacity constraints by prioritizing borrowers” who are the easiest to underwrite, JPMorgan Chase & Co. analysts led by Brian Ye in New York said in a report, referring to originators struggling to deal with a surge of business after a Mortgage Bankers Association index of refinancing applications more than doubled from this year’s low.

Record Low

The average rate on a typical 30-year mortgage fell to a record low 3.94 percent in the week ended yesterday, after averaging 4.26 percent in August and reaching this year’s high of 5.05 percent in early February, according to McLean, Virginia-based Freddie Mac. Loans usually close between one and three months after applications.

Prepayments on all Fannie Mae fixed rate 30-year mortgage bonds rose 27 percent last month to a CPR of 21.4. The measure represents the share of debt that would be retired in a year at the current pace. Speeds were “much faster than Street expectations for lower coupon” debt, Nomura Securities International Inc. analysts led by Ohmsatya Ravi said in a note to clients.

For higher-rate loans, whose prepayments are more often driven by borrower defaults, speeds “did not change materially and were in line with our expectations,” the analysts said.

Underperforming Treasuries

Prepayment speeds affect how long it takes for mortgage-bond investors to get their principal back, and can reduce returns when either faster or slower than expected. Fannie Mae mortgage bonds in all actively traded coupons underperformed Treasuries today as of 8:50 a.m. in New York, led by its 4 percent and 4.5 percent securities, which each suffered relative losses of 0.15 cents on the dollar, according to data compiled by Bloomberg.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, told 17 Democrats at a meeting yesterday that he will fix the Home Affordable Refinance Program, which lets borrowers take new loans for up to 125 percent of a home’s value, according to Representatives Elijah Cummings of Maryland and Dennis Cardoza of California, who led the group.

The changes the regulator for government-supported Fannie Mae and Freddie Mac is contemplating don’t go far enough, Cummings told reporters after the meeting. DeMarco is seeking to balance President Barack Obama’s promise of aid for homeowners with refinancing-rule changes in a Sept. 8 speech to Congress with his duty to conserve the companies’ assets.

Mortgage-bond prepayments are driven by refinancing, home sales and purchases of delinquent debt out of the securities by Fannie Mae and Freddie Mac or by servicers from bonds guaranteed by federal agency Ginnie Mae.

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