Market Outlook - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchMBS: Refi Flashback• Historical Conventional and early 2009 GNS-curves suggest that under normal conditions,the current Conventional S-curve has a lot tocatch up.• But even in an extended period of low ratesunder normal refi conditions, burnout is severe.Fees too are expected to increase over time andshould dampen long term CPRs.• Recent bank earnings discussed that GSEshave taken a more aggressive stance onputbacks. Fundamental changes to reps andwarrants would therefore not be consistent withthat policy. Capacity constraints should limitrefinancing as well.A Walk Through TimeWith enhancements to HARP around the corner, itmakes sense to look at prepays from a historicalperspective. In Chart 1, we show the history of FNprepays since 1994. Setting aside the peaks inrefinancing around late 2002-mid 2003, aggregateCPRs have generally peaked around the 30 CPRlevel. Towards the end of 2002, new lows inmortgage rates led to aggregate CPRs picking up tomid-40s and reached close to 60 CPR during thepeak of the 2003 refi’s.In Chart 2, we show the S-curves relating to some ofthese key periods. Clearly, not just in terms ofaggregate speeds, but also in terms of the S-curve,2003 was an outlier. But the current prepay situationis also a significant outlier, albeit on the oppositeside. If all HARP inefficiencies are eliminated,historical data suggest prepays should mimic the ex-2003 cluster of S-curves in Chart 2 with highercoupons approaching 50-60 CPR.Ginnie Prepays a Benchmark for HARP?Ginnie Mae’s streamlined refinancing could also beused as a benchmark for high HARP efficiency. InChart 3, we show the voluntary CPR history for 2008GNI 6s vs the FHA mortgage rate. The chartindicates that prepays peaked in May 2009 at 46.6CPR. In chart 4, we show the S-curves of voluntaryCPRs for GNIs for May-09. The S-curve tops off at aCPR lower than those seen in the historicalconventional S-curves in Chart 2. This isunderstandable given that higher GN delinquencies,reduce the refiable population to a larger extent.CPR706050403020100Chart 1: FN Fixed Rate Aggregate CPR vsMortgage RateRateJan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Source: eMBS, BloombergCPRChart 2: Prepay S-curves During Various RefiWaves80706050403020100-50 -25 0 25 50 75 100 125 150 175 200 225 250Source: BNP ParibasDec-98 Nov-01 Oct-02 Jul-03 Apr-04 Sep-11Chart 3: Average FHA Mortgage Rate vs 2008 30yGN I 6% PrepaysCPR50403020102008 GNI 6s04.0Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11Source: BNP Paribas, BloombergFHA Mortgage RateChart 3 also shows that even though FHA mortgagerates continued to decline steadily over time, prepaysactually declined. Burnout was therefore quite strong.6.56.05.55.04.59.508.507.506.505.504.503.50Mortgage RateMortgage RateAnish Lohokare / Timi Ajibola /Bo Peng 20 October 2011Market Mover24www.GlobalMarkets.bnpparibas.com