Mortgage Prepayments Drop to Slowest Pace Since 2003 (Update1)
bloomberg.com
Feb. 7 (Bloomberg) -- U.S. homeowners paid off their mortgages at the slowest pace in almost three years as rising prices and interest rates cooled the housing market and builders reported declining orders.
The prepayment rate on $438 billion of bonds paying 5.5 percent interest and guaranteed by Fannie Mae, the biggest provider of money for home loans, dropped to 10.1 percent in January, the slowest since March 2003, from 12.9 percent in the prior month, the Washington-based company said. Rival Freddie Mac said homeowners prepaid its 5.5 percent bonds at an 8.6 percent pace, the slowest since February 2003.
The drop may be the latest sign of a slowdown in housing, which Merrill Lynch & Co. said accounted for about half of U.S. economic growth since 2001. Signs of a weaker housing market have led investors in the $3 trillion market for mortgage-backed securities to sell the lowest-yielding bonds. Toll Brothers Inc., the largest U.S. builder of luxury homes, today said first- quarter orders plunged 29 percent.
``Rising rates have taken their toll'' on consumer refinancing to turn home equity into cash, said Akiva Dickstein, head of mortgage research at Merrill Lynch in New York. ``The housing market is showing some signs of slowdown, and Toll Brothers is evidence of that.''
Mortgage Rates
Declining prepayments follow an increase in the average 30- year fixed rate mortgage to 6.37 percent by mid-November from 5.71 percent in early September. A homeowner who applied for a $250,000 30-year fixed-rate loan in November would pay about $1,272 a year more based on that increase. The mortgage rate was 6.23 percent last week.
Mortgage bond investors are hurt as falling prepayments will further boost the expected life of securities, especially those with the lowest interest rates. The duration, or degree of interest rate-risk, on those bonds extends as interest rates rise, making their value fall faster than on debt without a prepayment option, such as Treasuries.
Mortgage bonds guaranteed by Fannie Mae and paying 5.5 percent interest yield 5.74 percent, or 1.18 percentage points more than the benchmark 10-year U.S. Treasury note. The spread, little changed from a week ago, has widened from 1.10 percentage points in August.
Higher Coupons
Investors have been swapping mortgage bonds with the lowest coupons, such as 5 percent, for those with higher coupons, such as 6 percent, said Alec Crawford, head of mortgage strategy at RBS Greenwich Capital in Greenwich, Connecticut.
When interest rates rise, bonds with lower coupons fall faster because they are the least likely to be paid off before maturity. Investors want the bonds to be redeemed so they can reinvest at higher rates.
Rising rates have corresponded with a drop in home sales, reducing loan turnover and slowing prepayments. Existing home sales in December fell to a 6.6 million annual rate, the slowest since March 2004.
Orders for Toll Brothers homes, which cost an average $709,000, dropped to 1,544 in the quarter from 2,173. Toll Brothers, based in Horsham, Pennsylvania, said sales would rise as little as 4.9 percent this year, half its previous forecast.
``A lot of anecdotal stories about home-related companies'' suggests that a slowdown in housing may be part of the drop in prepayments, Crawford said. ``Our call on residential real estate is not that we are entering a slump, but simply that we had incredible growth and will come back to more normal levels.''
Fannie Mae and Mclean, Virginia-based Freddie Mac, the two largest sources of money for U.S. home loans, package pools of mortgages from lenders into bonds that are sold to investors or purchased for their own portfolios. The government-chartered public companies also issue their own debt to raise cash for mortgage purchases. Government-owned Ginnie Mae issues only mortgage securities. |
