RBS-Rising Cuspy Coupon Prepayments

MBS Strategy | Special Report
Please see the last page of this publication for important disclosures.
July 8 2011
July Prepayment Commentary:
Rising Cuspy Coupon Prepayments

30-year mortgage rates have rallied ~30 bps from 4.84% in April to
4.55% in June, according to Freddie Macs Weekly Primary Mortgage
Market Survey. While this move has had little impact on credit-impaired
higher coupons, it has greatly increased refinancing exposure for new
production (2009 and 2010) cuspy premiums (4.5s and 5s). The July
prepayment report (June speeds) showed FN-30 were up 15% to 14.9
CPR from 13 CPR, and FH-30 increased 17% from 12 CPR to 14 CPR
month-over-month. Across coupons, 4.5s and 5s displayed a
significant increase while higher coupons slowed. By contrast, the
market (and we) had anticipated slower speeds for cuspy coupons
and slightly faster speeds for higher coupons than what came out from
the June print. As a result, we expect a repricing of TBAs and IOS.
30-Year Conforming Conventional

Across coupons, speed changes were rather uneven: 4.5s and 5s
showed a significant increase, surprising us on the upside, while
higher coupons slowed more than expected. Specifically, FN-30 4.5s
were up by 54% (+3.3 CPR), and 5s were up 29% (+3.7 CPR).
Conversely, premiums continued flat to a small decline: FN-30 6s
remained unchanged at 22.6 CPR and FN-30 6.5s were down 5% (-0.9
CPR).
With the continued weak housing turnover and stabilization of
involuntary prepay, the increase in cuspy coupons likely arose from the
following reasons:
1.
Sarah Hu, CFA

MBS, CMBS & ABS Strategy
+1 203 897 4683
sarah.hu@rbs.com
www.rbsm.com/strategy
Bloomberg: RBSR<GO>
Rate Refi: With a no-point mortgage rate of 4.82% (Freddie

PMMs rate: 4.64% with 0.7 pts) in May (affecting June
print), rate incentives are about 20 bps for 4.5s and 70 bps
for 5s, respectively. With pristine credit, 2009 and 2010
borrowers can take advantage of the best possible rates in
the market. However, although 20 bps in-the-money may
well cover the refi cost, it doesn't fully explain the 54%
increase for 4.5s speeds. For example, FN 2009 4.5s
increased 59% from 7.1 CPR to 11.3 CPR and FN 2010
4.5s jumped 55% from 4.5 CPR to 7 CPR. This magnitude
of increase is beyond the rationale provided by refinancing
into another 30-year mortgage (unless they paid points).
2.
Another possible explanation is refinancing down the

curve. It has become relatively easy to move down the
curve to refi into 15-year loans since the mortgage rate
curve has become steeper. The spread between 30-year
and 15-year conforming rate is about 82 bps in May versus
67 bps this January, and the spread between 30-year and
5/1 ARM rate is about 122 bps versus 104 bps over the
same period (figure 1 below).
Figure 1: Mortgage Rates and Spreads

Freddie Mac Mortgage Rates
Spread
30-Year
15-Year 5/1 ARM (30-15) Year 30 Year - 5/1 ARM
January
February
March
April
May
4.76
4.95
4.84
4.84
4.64
4.09
4.22
4.08
4.06
3.82
3.72
3.82
3.67
3.66
3.44
0.67
0.73
0.76
0.78
0.82
1.04
1.13
1.17
1.18
1.20
MBS Strategy | Special Report | July 8 2011
The Royal Bank of Scotland
Source: RBS, Freddie Mac
Assuming 30-year borrowers can refi into a 15-year

product with lower mortgage rates (from a May no-point
30-year mortgage rate of 4.64% to a 15-year mortgage rate
of 3.82%), as shown in the Figure 2 below, this option
results in the following: a) An increase in their monthly
payment by 40%, or ~ $ 467, from $ 1,115 to $ 1,582
(assuming a loan of $216,541, the average loan size for
2009 30-year 4.5s). b) A major savings in their lifetime
interest cost of about ~ $90,000. After deducting a
refinancing cost of ~ $3,500, the net saving would be ~
$86,500, which is enormous. c) A significant reduction in
payment duration from a 28-year mortgage to a 15-year
mortgage. For savvy borrowers (2009 4.5s have perfect
credit quality [69 LTV, 761 FICO], this might make sense -they can simply make additional payments by using their
uninvested cash to create huge savings while effectively
reducing their payment duration.
Figure 2: 2009 FN 4.5s Refi from 30-Year to 15-Year
Mortgage
Loan Balance Monthly

($)
Papyment ($)
30 Year @ 4.64%
15 Year @ 3.82%
Difference
216,541
216,541
1,115
1,582
467
Life Payment ($)

Payment ($)
(Principal + Balance) Duration (Years)
374,640
284,760
28
15
(89,880)
-13
Source: RBS, Bloomberg
Finally, fix-30 4.5s could refi into an ARM. However, based

on the Freddie Mac Quarterly Product Transition Statistics
(Figure 3 below), 99% of the fixed-30 year product
refinanced into another fixed rate mortgage (65% into 30year mortgage, 12% into 20-year mortgage and 22% into
15-year mortgage), and only 1% into ARMs.
2
Figure 3: Freddie Refinance Product Transition Statistics

Quarter
201001
201002
201003
201004
201101
Old Product
1-Year ARM
ARM - Hybrid
Balloon
FRM 15yr
FRM 20yr
FRM 30yr
1-Year ARM
ARM - Hybrid
Balloon
FRM 15yr
FRM 20yr
FRM 30yr
1-Year ARM
ARM - Hybrid
Balloon
FRM 15yr
FRM 20yr
FRM 30yr
1-Year ARM
ARM - Hybrid
Balloon
FRM 15yr
FRM 20yr
FRM 30yr
1-Year ARM
ARM - Hybrid
Balloon
FRM 15yr
FRM 20yr
FRM 30yr
New Product
1-Year ARM ARM - Hybrid Balloon FRM 15yr
0%
0%
0%
0%
0%
0%
3%
0%
1%
0%
0%
0%
2%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
7%
12%
9%
1%
0%
1%
3%
16%
12%
1%
1%
1%
6%
20%
12%
1%
1%
1%
14%
26%
11%
1%
1%
1%
11%
16%
4%
2%
1%
1%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
FRM 20yr
17%
8%
24%
71%
58%
16%
24%
6%
24%
71%
57%
18%
29%
6%
25%
83%
65%
18%
27%
6%
20%
86%
67%
19%
22%
6%
21%
84%
63%
22%
4%
3%
7%
2%
9%
12%
3%
2%
9%
3%
9%
12%
5%
3%
10%
2%
12%
14%
9%
5%
8%
1%
10%
12%
5%
4%
11%
2%
8%
12%
FRM 30yr
72%
78%
60%
26%
33%
72%
67%
76%
54%
25%
33%
69%
59%
72%
53%
13%
23%
68%
51%
64%
62%
12%
22%
68%
62%
74%
64%
13%
28%
65%
Source: RBS, Freddie Mac
3.
In addition, increased day-count and an up-tick in

seasonality have likely resulted in 5 ~ 8% increase in
speeds. Day-count was up about 5% from 21 days in May
to 22 days in June, while seasonality index improved by ~
3%. However, the effect of day-count and seasonality
should affect speeds across the board, rather than for only
cuspy coupons.
15-Year Conforming Conventional

Aggregate FNMA 15-years printed 15 CPR in June, up 20% (+2.5CPR)
from May speeds. The change across the coupons has a pattern
similar to that of 30year speeds: cuspy coupons prepaid faster while
higher coupons barely changed. For example, 4s were up by 55%
(+4.9 CPR) and 4.5s were up 17% (+2.6 CPR). By contrast, both 5s
and 5.5s were unchanged, prepaying at 19.6 CPR.
Given the same incentive, 15-year prepaid faster than 30-year in the
lower coupons, but slower in the higher coupons. For example, FH-15
4s prepaid 14 CPR, which is 4.5 CPR higher than 30-year 4.5s
(9.5CPR). Similarly, FH-15 4.5s prepaid 18.7 CPR - 2 CPR higher than
30-year 5s (16.7 CPR). By contrast, FH-15 higher coupons prepaid
3
slower relative to their 30-year counterparts: Both FH-15 5s and 5.5s

prepaid 19.6 CPR, which represented 1.7 CPR and 3 CPR slower than
FH-30 5.5s and 6s, respectively. The slower speeds for higher coupons
in FH-15 are mostly the result of lower involuntary prepays, as 15-year
generally has stronger credit borrowers than 30-year. The average
involuntary prepays were about 2.4 CPR and 3.9 CPR slower for FH-15
5s and 5.5s than their FH-30 5.5 and 6 counterparts.
GNMA Prepayments
GN1 increased 16% from 9 CPR to 10.4 CPR, and GN2 were up 16%
to 9.1 CPR from 7.8 CPR in the prior month. GN1 speeds were faster
across-the-board, except for the 6.5s. Specifically, GN1 speeds were
up 36%, 17%, 11% and 3% from coupon 4.5s to 6s, respectively.
Similarly, GN2 accelerated 29%, 24%, 14% and 9% for coupon 4.5s
through 6s, respectively. However, GN1 and GN2 exhibited a slightly
different prepay pattern on 6.5s: GN1 were down 3% to 16.1 CPR while
GN2 were up 10% to 18.8 CPR.
Short-Term Prepayment Forecasts

We expect next month's prepayments (August factor) to continue
drifting upwards, reflecting a combination of higher rate refi incentives,
lower day-count, and unchanged seasonality.
The lagged mortgage rates dropped from 4.64% for June to 4.50% for
July. Meantime, day-count was down about 9% from 22 to 20 days
over the same period, while the seasonality index was largely
unchanged. All factors considered, we expect July speeds (August
factor) to slightly increase by ~10% from the June print. However,
speed change across coupons will likely remain uneven: Cuspy
premiums, such as 4.5s and 5s are expected to prepay faster while
higher coupons will likely continue to be rate-independent.
As usual, our detailed speed forecasts by product type, coupon and
vintage are appended in our RBS Monthly Prepayment Commentary.
Figure 4: FNMA 30 Year Short-Term Prepayment Forecasts (by Factor Months)

CPN
Year
CurBal (MM)
WALA
11-Aug
3.5
3.5
11-Sep
11-Oct
2011
2,214
2.6
2.8
3.0
2010
39,006
3.5
3.7
3.9
Act 1M
Proj 1M
Err 1M
2.2
2.2
0.0
2.8
3.2
0.4
2011
15,109
3.2
3.1
3.4
2.1
2.5
0.4
2010
162,451
4.9
4.7
4.8
4.1
4.1
0.0
2009
123,985
26
7.7
7.3
7.2
6.8
7.1
0.3
4.5
2010
150,902
12
8.5
7.8
7.8
6.8
7.0
0.2
4.5
2009
271,414
24
12.3
11.3
11.3
10.5
11.0
0.5
4.5
2008
20,100
31
17.4
16.0
15.8
14.7
15.5
0.8
4.5
2005
5,677
71
20.2
19.1
19.0
18.2
18.8
0.6
4.5
2004
4,087
80
18.8
17.7
17.5
17.0
17.4
0.4
4.5
2003
15,870
94
16.6
15.4
15.2
15.0
15.5
0.5
2010
64,713
13
10.1
9.7
9.9
8.5
8.6
0.1
2009
90,697
22
14.1
13.4
13.4
12.3
12.9
0.6
2008
47,197
37
24.7
23.9
23.7
22.6
23.4
0.8
2007
13,480
47
20.7
20.3
20.1
19.7
20.0
0.3
2006
6,355
59
21.4
21.0
20.9
20.1
20.6
0.5
2005
55,964
72
19.7
19.2
19.1
18.7
18.8
0.1
2004
32,700
83
21.5
20.6
20.4
19.6
20.5
0.9
2003
72,929
94
22.4
21.3
21.0
20.7
21.6
0.9
5.5
2009
9,854
22
13.6
13.6
13.6
12.9
13.1
0.2
5.5
2008
70,806
37
25.8
25.6
25.4
24.4
25.3
0.9
5.5
2007
70,230
48
24.1
24.0
23.8
23.0
23.8
0.8
5.5
2006
38,025
57
23.8
23.8
23.7
23.4
23.4
0.0
5.5
2005
57,387
71
19.7
19.6
19.6
19.0
19.0
0.0
5.5
2004
48,076
81
19.7
19.4
19.2
18.6
19.0
0.4
5.5
2003
72,562
96
21.3
20.8
20.5
20.7
21.1
0.4
2009
1,127
25
21.7
21.9
22.0
20.9
21.5
0.6
2008
35,602
37
25.1
25.4
25.2
24.9
25.1
0.2
2007
87,899
47
23.6
23.8
23.7
23.8
23.8
0.0
2006
52,649
59
24.6
24.8
24.6
23.9
24.6
0.7
2005
17,620
69
19.8
20.0
20.0
19.5
19.6
0.1
2004
13,551
82
18.5
18.4
18.2
18.2
18.3
0.1
2003
14,430
95
19.8
19.5
19.3
19.1
19.9
0.8
6.5
2008
8,033
37
24.5
24.9
24.8
24.0
24.7
0.7
6.5
2007
22,126
47
22.8
23.2
23.0
22.4
23.3
0.9
6.5
2006
19,471
60
21.8
22.0
21.9
21.7
21.9
0.2
6.5
2005
3,561
66
17.7
17.9
17.9
17.4
17.7
0.3
6.5
2004
1,812
82
17.3
17.4
17.3
16.6
17.3
0.7
6.5
2003
1,303
93
16.9
16.8
16.6
16.5
17.2
0.7
2008
2,708
36
24.2
24.6
24.6
23.9
24.6
0.7
2007
7,151
47
22.9
23.2
23.0
22.6
23.4
0.8
2006
2,923
59
21.0
21.2
21.1
20.7
21.2
0.5
Source: RBS
5
Figure 5: FNMA 15 Year Short-Term Prepayment Forecasts (by Factor Months)

CPN
Year
CurBal (MM)
WALA
11-Aug
11-Sep
11-Oct
Act 1M
Proj 1M
Err 1M
2011
3,534
4.5
3.9
4.0
2.6
2.7
0.1
2010
7,025
4.9
4.2
4.3
3.1
3.2
0.1
3.5
2011
17,418
5.0
4.5
4.8
3.2
3.2
0.0
3.5
2010
51,439
10.0
9.1
9.2
6.9
6.9
0.0
3.5
2009
1,045
17
13.9
13.0
12.9
11.1
11.2
0.1
2011
18,417
10.5
11.6
12.0
6.2
6.3
0.0
2010
43,753
13
16.5
15.6
15.4
12.6
12.7
0.1
2009
53,914
23
20.0
18.8
18.3
16.2
16.4
0.2
2008
2,972
33
26.8
25.6
25.0
22.3
22.4
0.1
2005
895
72
24.9
23.9
23.4
20.6
20.8
0.2
2004
2,190
86
22.1
21.3
20.7
18.5
18.8
0.3
2003
9,565
94
22.5
21.7
21.3
19.0
19.2
0.2
4.5
2010
9,164
14
15.1
14.5
14.3
12.1
12.0
-0.1
4.5
2009
18,063
23
22.3
21.2
20.6
18.4
18.6
0.2
4.5
2008
10,950
37
33.5
32.1
31.0
27.9
28.0
0.1
4.5
2007
1,215
43
31.2
29.9
28.8
25.8
26.0
0.2
4.5
2005
3,905
72
25.3
24.6
23.8
21.2
21.3
0.1
4.5
2004
8,518
85
21.0
20.2
19.7
18.2
17.8
-0.4
4.5
2003
29,688
96
21.3
20.6
20.1
17.9
18.0
0.1
4.5
2002
1,138
100
21.7
21.7
20.8
17.8
18.5
0.7
2009
1,264
23
18.9
18.9
18.2
16.2
16.4
0.2
2008
8,670
37
31.9
30.9
29.9
27.0
27.2
0.2
2007
3,029
48
29.1
29.3
27.6
24.8
24.8
0.0
2006
1,753
59
26.8
27.0
25.5
22.9
22.8
-0.1
2005
5,991
71
22.5
22.8
21.5
19.0
19.0
0.0
2004
7,488
82
20.5
19.9
19.3
17.4
17.5
0.1
2003
19,896
97
19.8
20.0
19.2
17.1
17.1
0.0
2002
9,312
104
22.9
23.2
22.1
19.3
19.5
0.2
5.5
2008
2,920
36
30.2
30.7
29.0
26.2
26.3
0.1
5.5
2007
6,027
46
28.6
29.0
27.4
24.5
24.6
0.1
5.5
2006
5,479
58
27.3
27.9
26.3
22.8
23.4
0.6
5.5
2005
3,104
69
21.8
22.3
21.1
18.7
18.8
0.1
5.5
2004
2,634
82
19.5
19.8
18.9
16.7
17.2
0.5
5.5
2003
2,943
96
16.5
16.9
16.2
14.6
14.6
0.0
5.5
2002
4,089
106
20.2
20.7
19.8
17.4
17.7
0.3
5.5
2001
2,174
114
18.8
19.2
18.4
16.2
16.6
0.4
2008
810
35
22.0
22.8
21.7
19.6
19.7
0.1
2007
3,160
46
23.5
24.5
23.1
20.6
20.8
0.2
2006
3,653
58
24.5
25.6
24.2
21.2
21.5
0.3
2002
1,851
109
17.2
17.9
17.2
15.2
15.5
0.3
2001
1,784
117
17.0
17.7
17.0
15.3
15.4
0.1
Source: RBS
Figure 6: FHLMC 30 Year Short-Term Prepayment Forecasts (by Factor Months)

CPN
Year
CurBal (MM)
WALA
11-Aug
11-Sep
11-Oct
Act 1M
Proj 1M
Err 1M
3.5
2011
3,289
3.0
3.1
3.3
2.3
2.6
0.3
3.5
2010
5,164
3.6
3.7
3.8
3.1
3.1
0.0
2010
74,336
5.1
4.8
4.9
4.3
4.3
0.0
2009
56,841
26
8.5
7.8
7.8
7.6
7.6
0.0
4.5
2010
98,523
13
10.2
9.2
9.3
8.2
8.4
0.2
4.5
2009
170,383
25
12.3
11.1
11.1
10.7
10.8
0.1
4.5
2008
1,463
38
20.1
18.1
18.0
17.5
17.6
0.1
4.5
2005
6,541
72
17.9
16.7
16.6
15.7
16.4
0.7
4.5
2004
1,654
85
14.1
12.9
12.8
11.9
12.8
0.9
4.5
2003
8,351
95
16.1
14.6
14.3
14.6
14.6
0.0
2010
43,682
15
11.2
10.6
10.8
9.4
9.6
0.2
2009
58,311
23
16.2
15.0
15.0
14.4
14.6
0.2
2008
30,968
39
24.1
22.9
22.7
22.3
22.4
0.1
2007
8,534
50
20.7
20.0
19.8
19.3
19.6
0.3
2006
4,427
61
20.1
19.4
19.3
18.5
19.0
0.5
2005
44,446
72
19.1
18.3
18.2
17.4
17.8
0.4
2004
23,131
85
19.2
18.1
17.8
17.8
18.0
0.2
2003
36,427
95
19.5
18.2
17.9
18.0
18.3
0.3
5.5
2009
5,446
24
19.5
19.1
19.1
18.2
18.6
0.4
5.5
2008
39,482
38
24.0
23.4
23.2
22.9
23.1
0.2
5.5
2007
37,017
50
22.2
21.7
21.6
21.5
21.6
0.1
5.5
2006
21,833
60
22.1
21.6
21.5
21.1
21.3
0.2
5.5
2005
37,393
72
18.6
18.2
18.1
17.5
17.6
0.1
5.5
2004
26,632
84
19.0
18.4
18.1
17.5
18.3
0.8
5.5
2003
28,851
97
19.9
19.0
18.7
17.6
19.4
1.8
2009
950
26
19.9
19.9
19.9
18.5
19.4
0.9
2008
20,966
37
24.1
23.9
23.8
23.0
23.7
0.7
2007
41,043
48
22.3
22.1
22.0
21.5
22.1
0.6
2006
36,405
60
23.4
23.1
23.0
22.4
23.0
0.6
2005
6,621
70
19.4
19.2
19.1
18.0
18.7
0.7
2004
5,953
84
19.7
19.2
19.0
18.3
19.1
0.8
2003
4,579
96
17.3
16.8
16.4
16.6
17.0
0.4
6.5
2008
5,497
37
22.5
22.4
22.3
21.7
22.2
0.5
6.5
2007
12,052
47
20.4
20.3
20.1
20.0
20.3
0.3
6.5
2006
9,059
60
22.0
21.9
21.8
21.5
21.8
0.3
2008
1,098
37
25.3
25.2
25.1
24.5
25.0
0.5
2007
1,473
46
23.8
23.6
23.4
23.7
23.8
0.1
2006
777
59
20.1
20.0
19.9
19.7
20.0
0.3
Source: RBS
Figure 7: GNMA-I 30 -Year Short-Term Prepayment Forecasts (by Factor Months)

CPN
Year
CurBal (MM)
WALA
11-Aug
11-Sep
2010
2009
11-Oct
Act 1M
35,550
5.3
14,291
25
7.5
Proj 1M
Err 1M
5.7
6.2
4.2
4.2
0.0
6.7
6.7
6.0
6.5
0.5
4.5
2010
58,113
14
8.2
7.9
8.2
7.1
7.3
0.2
4.5
2009
108,245
24
8.9
8.5
8.6
8.0
8.1
0.1
4.5
2003
1,981
95
13.8
13.0
12.7
12.8
12.8
0.0
2010
15,081
15
11.1
10.7
11.2
10.0
10.0
0.0
2009
72,480
24
11.5
11.2
11.2
10.5
10.8
0.3
2008
10,849
37
16.1
15.1
15.1
14.5
14.9
0.4
2005
4,731
72
15.8
14.7
14.4
14.7
15.0
0.3
2004
2,888
85
14.5
13.6
13.5
13.2
13.5
0.3
2003
8,997
96
13.9
13.1
13.0
13.0
13.0
0.0
5.5
2009
7,879
26
16.5
16.0
16.2
15.3
15.5
0.2
5.5
2008
23,079
36
18.6
17.8
17.8
17.4
17.8
0.4
5.5
2007
3,234
49
21.3
20.3
19.9
20.2
20.7
0.5
5.5
2006
2,867
62
19.1
18.2
17.9
18.1
18.6
0.5
5.5
2005
4,918
72
16.0
15.3
14.9
15.2
15.7
0.5
5.5
2004
4,900
85
15.8
15.3
15.2
14.9
15.1
0.2
5.5
2003
10,184
97
14.9
14.5
14.4
13.8
14.3
0.5
5.5
2002
1,876
104
16.7
16.3
16.2
15.7
16.1
0.4
2009
1,722
28
23.3
22.9
23.1
21.7
22.3
0.6
2008
16,150
35
20.1
19.5
19.4
18.8
19.6
0.8
2007
5,231
48
20.0
19.4
19.0
19.8
19.8
0.0
4,820
60
20.6
19.9
19.6
19.8
20.2
0.4
2006
2005
1,163
72
14.9
14.5
14.2
14.4
14.8
0.4
2004
2,057
84
14.0
13.7
13.7
13.5
13.6
0.1
2003
2,730
96
13.4
13.1
13.0
12.9
13.0
0.1
2002
2,540
107
15.6
15.3
15.3
14.8
15.2
0.4
2001
1,070
117
16.6
16.4
16.4
15.8
16.3
0.5
6.5
2008
2,712
34
20.5
20.1
19.9
19.8
20.2
0.4
6.5
2007
1,589
47
19.8
19.4
19.0
19.5
20.1
0.6
6.5
2006
1,462
59
17.3
17.0
16.7
17.3
17.5
0.2
6.5
2002
1,371
109
14.1
13.9
13.9
13.5
13.8
0.3
6.5
2001
1,221
119
12.8
12.8
12.8
12.3
12.6
0.3
Source: RBS
Figure 8: GNMA-II 30 -Year Short-Term Prepayment Forecasts (by Factor Months)

CPN
Year
CurBal (MM)
WALA
11-Aug
11-Sep
11-Oct
Act 1M
2010
2009
Proj 1M
Err 1M
34,514
5.2
5.3
5.9
2,539
24
5.9
5.1
5.1
3.6
4.1
0.5
4.7
5.0
0.3
4.5
2010
81,977
13
7.1
7.0
7.3
6.3
6.4
0.1
4.5
2009
46,799
24
7.4
7.1
7.4
6.5
6.7
0.2
4.5
2003
557
96
15.9
14.9
14.7
14.6
14.9
0.3
2010
64,377
15
11.1
10.6
11.1
9.6
9.9
0.3
2009
52,167
22
10.2
9.8
10.2
9.0
9.1
0.1
2008
4,335
36
16.8
16.0
16.0
15.4
15.4
0.0
2005
5,108
72
16.7
15.6
15.2
15.2
15.9
0.7
2004
2,015
84
15.2
14.2
14.1
13.7
14.2
0.5
2003
3,862
96
14.1
13.2
13.1
13.1
13.2
0.1
5.5
2009
6,090
23
16.5
15.9
16.1
14.9
15.1
0.2
5.5
2008
19,432
36
19.1
18.4
18.4
17.4
17.7
0.3
5.5
2007
4,165
49
18.4
17.7
17.3
17.9
17.9
0.0
5.5
2006
3,260
61
20.4
19.6
19.4
18.6
19.4
0.8
5.5
2005
6,214
70
15.2
14.4
14.1
14.6
14.6
0.0
5.5
2004
5,595
85
15.4
14.7
14.7
14.2
14.6
0.4
5.5
2003
4,585
96
13.2
12.8
12.7
12.7
12.7
0.0
5.5
2002
922
104
16.5
16.2
16.1
15.6
16.1
0.5
2009
309
28
18.1
17.8
18.2
16.6
16.9
0.3
2008
13,008
36
21.0
20.6
20.4
19.7
20.0
0.3
2007
7,775
48
21.1
20.6
20.3
20.4
21.0
0.6
4,956
60
21.9
21.4
21.2
21.1
21.2
0.1
2006
2005
1,337
71
20.0
19.2
18.7
19.3
19.9
0.6
2004
2,658
84
15.1
14.7
14.7
14.6
14.7
0.1
2003
806
95
13.0
12.8
12.7
12.4
12.7
0.3
2002
1,133
107
13.5
13.3
13.3
13.3
13.3
0.0
2001
799
118
14.6
14.4
14.4
14.3
14.4
0.1
6.5
2008
4,084
36
21.0
20.7
20.6
20.4
20.5
0.1
6.5
2007
3,082
47
19.2
19.0
18.5
18.7
19.4
0.7
6.5
2006
1,624
59
22.1
21.8
21.5
21.3
21.7
0.4
6.5
2002
403
109
13.0
12.8
12.8
12.4
12.9
0.5
6.5
2001
552
120
17.2
17.0
17.0
16.5
16.9
0.4
Source: RBS
Figure 9: 30-Year Prepayment Report

FNMA 30- Year Prepayment Report
Cpn
4
4
4.5
4.5
4.5
4.5
4.5
4.5
5
5
5
5
5
5
5
5
5.5
5.5
5.5
5.5
5.5
5.5
5.5
6
6
6
6
6
6
6
6.5
6.5
6.5
6.5
6.5
6.5
7
7
7
7.5
Factor Date
1-mo Change
Orig Yr
WAC WAM WALA Jul-11 Jun-11
%
CPR
348
9
4.4
2.7
61
1.7
2010 121,260 4.5
26
7.2
5.3
36
1.9
2009 103,046 4.58 328
13
7.0
4.5
55
2.5
2010 122,986 4.94 343
25
11.3
7.1
59
4.2
2009 229,462 4.94 329
6,241
5.18 316
38
17.4
12.7
37
4.7
2008
5,451
5.27 278
73
18.3
13.4
36
4.9
2005
3,549
5.13 264
85
16.0
11.0
45
5.0
2004
16,584 5.06 253
95
15.7
11.0
42
4.7
2003
58,248 5.36 342
14
8.7
6.0
44
2.7
2010
57,512 5.43 331
23
14.6
9.8
49
4.8
2009
41,324 5.65 316
38
23.4
18.3
27
5.1
2008
9,671
5.75 303
51
19.0
18.2
5
0.8
2007
5,760
5.77 291
61
19.5
17.4
12
2.1
2006
55,375 5.63 280
72
18.7
16.0
17
2.7
2005
29,582 5.53 264
86
19.6
15.2
29
4.4
2004
70,689 5.49 252
95
20.6
15.6
32
5.0
2003
7,481
5.95 331
24
14.3
12.0
19
2.3
2009
61,699 6.03 317
38
24.0
22.4
7
1.6
2008
55,922 6.13 305
49
23.6
23.4
1
0.2
2007
25,206 6.15 293
60
23.2
22.6
3
0.6
2006
49,629 5.98 280
72
18.4
17.1
7
1.3
2005
39,052 5.93 265
84
18.6
16.9
10
1.7
2004
68,045 5.93 250
97
21.1
19.7
7
1.4
2003
1,271
6.47 329
26
20.3
14.0
45
6.3
2009
30,865 6.52 318
37
24.3
24.0
1
0.3
2008
66,401 6.56 307
47
23.6
23.4
1
0.2
2007
49,401 6.55 293
60
23.6
23.9
-1
-0.3
2006
12,502 6.49 282
71
18.2
17.9
2
0.3
2005
14,820 6.43 265
84
18.1
18.6
-3
-0.5
2004
12,142 6.47 252
97
19.8
18.8
5
1.0
2003
8,240
6.98 318
37
23.4
24.2
-3
-0.8
2008
17,343 7.05 308
47
21.9
22.9
-4
-1.0
2007
19,496 7.01 293
60
21.4
23.2
-8
-1.8
2006
2,025
6.97 282
70
16.1
14.7
10
1.4
2005
1,860
6.98 266
84
16.3
18.0
-9
-1.7
2004
1,070
7.06 254
96
17.5
18.4
-5
-0.9
2003
2,843
7.49 318
36
23.3
23.7
-2
-0.4
2008
4,990
7.64 307
47
22.3
22.2
1
0.1
2007
3,385
7.61 293
60
20.8
21.2
-2
-0.4
2006
767
8.16 308
47
20.9
25.3
-17
-4.4
2007
Cbal
($MM)
FHLMC 30-Year Prepayment Report

Cpn
4
4
4.5
4.5
4.5
4.5
4.5
4.5
5
5
5
5
5
5
5
5
5.5
5.5
5.5
5.5
5.5
5.5
5.5
6
6
6
6
6
6
6
6.5
6.5
6.5
6.5
6.5
6.5
7
7
7
7.5
FH-FN
Factor Date
1-mo Change CPR
Orig Yr
WAC WAM WALA Jul-11 Jun-11
%
CPR Jul-11
74,199 4.49 348
9
4.3
3.0
42
1.3
-0.1
2010
56,824
4.6
327
26
7.6
5.1
49
2.5
0.4
2009
98,517 4.95 342
13
8.2
5.0
65
3.2
1.2
2010
25
10.7
7.2
49
3.5
-0.6
2009 170,370 4.93 329
1,247
5.12 314
40
17.4
9.4
84
8.0
0.0
2008
6,535
5.27 279
72
15.7
11.9
32
3.8
-2.6
2005
1,674
5.1
263
85
12.0
10.1
20
1.9
-4.0
2004
8,334
5.03 253
95
14.6
10.3
41
4.3
-1.1
2003
43,726 5.37 342
15
9.4
6.8
38
2.6
0.7
2010
58,270 5.41 332
23
14.4
9.5
52
4.9
-0.2
2009
31,110 5.63 315
39
22.2
17.7
26
4.5
-1.2
2008
8,383
5.73 303
51
19.4
16.9
15
2.5
0.4
2007
4,377
5.74 291
61
18.4
16.2
13
2.2
-1.1
2006
44,532 5.63 280
72
17.4
14.7
18
2.7
-1.3
2005
22,916 5.52 264
85
17.8
14.0
27
3.8
-1.8
2004
36,559 5.47 252
95
17.9
14.1
28
3.8
-2.7
2003
5,411
5.95 330
24
18.5
14.2
31
4.3
4.2
2009
39,587 6.03 316
38
22.9
20.3
12
2.6
-1.1
2008
36,928
6.1
304
50
21.5
20.2
7
1.3
-2.1
2007
21,544 6.13 292
60
21.1
21.2
-1
-0.1
-2.1
2006
38,021 5.94 279
72
17.5
16.4
7
1.1
-0.9
2005
25,699 5.91 264
84
17.6
16.5
7
1.1
-1.0
2004
29,095 5.93 250
97
17.5
16.9
4
0.6
-3.6
2003
926
6.46 328
26
18.9
16.9
11
2.0
-1.4
2009
21,019
6.5
318
37
23.0
24.0
-4
-1.0
-1.3
2008
41,013 6.53 306
48
21.5
21.6
-1
-0.1
-2.1
2007
36,526
6.5
292
60
22.4
21.7
3
0.7
-1.2
2006
6,550
6.41 281
70
18.1
18.1
0
0.0
-0.1
2005
5,962
6.38 265
84
18.2
18.6
-2
-0.4
0.1
2004
4,601
6.43 252
96
16.6
17.1
-3
-0.5
-3.2
2003
5,450
6.94 318
36
21.7
21.8
-1
-0.1
-1.7
2008
12,094 7.02 307
47
20.1
20.7
-3
-0.6
-1.8
2007
9,092
6.95 293
60
21.3
21.2
1
0.1
-0.1
2006
556
6.91 280
70
18.1
13.6
34
4.5
2.0
2005
715
6.9
265
84
17.7
14.6
22
3.1
1.4
2004
548
6.96 255
95
15.0
13.0
15
2.0
-2.5
2003
1,113
7.42 316
37
24.8
22.4
11
2.4
1.5
2008
1,448
7.59 308
46
23.3
25.3
-8
-2.0
1.0
2007
786
7.49 293
59
19.9
22.8
-13
-2.9
-0.9
2006
151
8.21 307
46
22.7
18.6
22
4.1
1.8
2007
Cbal
($MM)
FH-FN
CPR
Jun-11
0.3
-0.2
0.5
0.1
-3.3
-1.5
-0.9
-0.7
0.8
-0.3
-0.6
-1.3
-1.2
-1.3
-1.2
-1.5
2.2
-2.1
-3.2
-1.4
-0.7
-0.4
-2.8
2.9
0.0
-1.8
-2.2
0.2
0.0
-1.7
-2.4
-2.2
-2.0
-1.1
-3.4
-5.4
-1.3
3.1
1.6
-6.7
FH-FN
CPR
Chg
-0.4
0.6
0.7
-0.7
3.3
-1.1
-3.1
-0.4
-0.1
0.1
-0.6
1.7
0.1
0.0
-0.6
-1.2
2.0
1.0
1.1
-0.7
-0.2
-0.6
-0.8
-4.3
-1.3
-0.3
1.0
-0.3
0.1
-1.5
0.7
0.4
1.9
3.1
4.8
2.9
2.8
-2.1
-2.5
8.5
Source: RBS, CPR/CDR
10
Figure 10: 15-Year Prepayment Report

FNMA 15-Year Prepayment Report
FHLMC 15-Year Prepayment Report

Factor Date
1-mo Change
Orig
Yr
Cbal
($MM)
WAC WAM WALA
3.5 2010
43,877
3.93
169
4 2010
39,923
4.41
164
4 2009
39,356
4.49
151
24
17.0
10.5
4 2008
1,238
4.59
137
37
20.3
15.4
4 2005
801
4.76
102
72
21.1
15.6
35
Cpn
Factor Date
Jul-11
Jun-11
CPR
Cpn
Orig
Yr
Cbal
($MM)
WAC WAM WALA
7.3
4.2
73
3.1
3.5 2010
29,189
3.97
169
13
12.9
7.4
74
5.5
4 2010
27,357
4.42
63
6.5
4 2009
25,477
32
4.9
4 2008
224
5.5
4 2005
1-mo Change
FH-FN
FH-FN
FH-FN
CPR
CPR
CPR
Chg
Jul-11
Jun-11
CPR
Jul-11
Jun-11
8.2
4.4
84
3.8
0.9
0.2
0.7
163
13
14.1
7.8
81
6.3
1.2
0.4
0.8
4.47
151
24
16.2
10.5
55
5.7
-0.8
0.0
-0.8
4.55
135
39
19.2
12.7
52
6.5
-1.1
-2.7
1.6
510
4.78
102
72
19.6
15.9
23
3.7
-1.5
0.3
-1.8
4 2004
2,268
4.58
89
86
17.8
15.6
14
2.2
4 2004
2,494
4.58
88
86
17.7
14.2
24
3.5
-0.1
-1.4
1.3
4 2003
8,509
4.55
80
95
18.9
16.8
13
2.1
4 2003
7,717
4.58
79
95
16.0
14.1
14
1.9
-2.9
-2.7
-0.2
4.5 2010
8,754
4.84
162
15
12.3
8.8
41
3.5
4.5 2010
6,233
4.84
161
15
11.3
9.4
20
1.9
-1.0
0.6
-1.6
4.5 2009
16,725
4.89
151
24
18.8
12.9
45
5.9
4.5 2009
12,175
4.85
151
24
17.6
13.7
29
3.9
-1.2
0.8
-2.0
4.5 2008
8,622
5.05
136
39
29.4
25.1
17
4.3
4.5 2008
3,284
5.07
135
39
26.5
21.5
23
5.0
-2.9
-3.6
0.7
4.5 2004
7,954
4.96
88
86
17.8
16.8
1.0
4.5 2004
7,083
4.94
88
86
17.5
14.8
18
2.7
-0.3
-2.0
1.7
4.5 2003
28,258
4.96
78
96
17.9
17.3
0.6
4.5 2003
23,315
4.96
77
96
16.0
14.9
1.1
-1.9
-2.4
0.5
5 2009
1,073
5.48
151
24
18.8
16.9
11
1.9
5 2009
792
5.46
150
25
19.6
14.8
32
4.8
0.8
-2.1
2.9
-1.3
5 2008
6,802
5.56
137
37
27.0
25.2
1.8
5 2008
3,923
5.55
137
37
24.6
24.1
0.5
-2.4
-1.1
5 2007
2,268
5.71
125
49
24.6
27.9
-12
-3.3
5 2007
1,457
5.73
125
49
20.7
26.0
-20
-5.3
-3.9
-1.9
-2.0
5 2006
1,333
5.67
112
62
23.1
21.2
1.9
5 2006
807
5.65
111
62
20.4
22.5
-9
-2.1
-2.7
1.3
-4.0
2.4
5 2005
5,807
5.49
102
72
18.0
19.2
-6
-1.2
5 2005
5,204
5.46
101
72
19.2
18.0
1.2
1.2
-1.2
5 2003
18,062
5.44
76
98
16.9
17.3
-2
-0.4
5 2003
11,992
5.43
75
98
16.4
16.2
0.2
-0.5
-1.1
0.6
5 2002
7,531
5.5
70
105
19.6
19.2
0.4
5 2002
5,659
5.52
69
104
17.1
17.0
0.1
-2.5
-2.2
-0.3
5.5 2008
2,729
6.01
138
36
26.0
25.0
1.0
5.5 2008
1,419
138
36
23.5
24.2
-3
-0.7
-2.5
-0.8
-1.7
5.5 2007
3,683
6.07
126
49
23.8
22.3
1.5
5.5 2007
2,260
6.05
125
49
23.3
22.9
0.4
-0.5
0.6
-1.1
5.5 2006
3,364
6.01
113
61
22.6
21.9
0.7
5.5 2006
2,262
6.01
112
61
23.3
21.7
1.6
0.7
-0.2
0.9
5.5 2005
2,071
5.91
103
71
16.4
17.0
-4
-0.6
5.5 2005
1,353
5.87
103
71
16.3
17.5
-7
-1.2
-0.1
0.5
-0.6
5.5 2001
1,133
57
117
17.0
18.6
-9
-1.6
5.5 2001
1,085
5.98
58
117
16.1
16.3
-1
-0.2
-0.9
-2.3
1.4
6 2006
2,547
6.47
114
60
20.5
20.7
-1
-0.2
6 2006
1,256
6.46
114
60
19.7
20.7
-5
-1.0
-0.8
0.0
-0.8
11
Figure 11: GNMA Prepayment Report

GNMA I 30-Year Prepayment Report
1-mo Change
GN1-GN2 GN1-GN2 GN1-GN2
Factor Date
1-mo Change
CPR
Cpn
Cbal
($MM)
CPR
CPR
Orig
Yr
CPR
WAC WAM WALA July 11 June 11
CPR
July 11
June 11
Chg
3.0
41
1.3
2010
34,449
4.38
349
3.6
2.8
29
0.8
0.7
0.2
0.5
6.1
5.0
20
1.1
2009
2,535
4.47
333
24
4.7
4.0
20
0.7
1.4
1.0
0.4
14
7.1
5.1
39
2.0
4.5 2010
81,878
4.87
345
13
6.3
4.7
35
1.6
0.8
0.4
0.4
332
24
8.0
5.8
38
2.2
4.5 2009
46,789
4.92
333
24
6.5
5.1
27
1.4
1.5
0.7
0.8
251
95
12.7
9.3
37
3.4
4.5 2003
552
5.11
252
95
14.8
7.5
96
7.3
-2.1
1.8
-3.9
Orig
Yr
Cbal
($MM)
4 2010
34,580
4.5
349
4.3
4 2009
14,269
4.5
331
25
4.5 2010
58,645
344
4.5 2009
107,914
4.5 2003
2,012
Cpn
GNMA II 30-Year Prepayment Report
Factor Date
WAC WAM WALA July 11 June 11
5 2010
15,490
5.5
343
15
9.9
8.0
25
1.9
2010
58,689
5.29
344
14
9.8
7.4
33
2.4
0.1
0.6
-0.5
5 2009
72,085
5.5
333
24
10.5
9.1
16
1.4
2009
61,992
5.35
335
22
8.8
7.3
21
1.5
1.7
1.8
-0.1
-1.9
5 2008
10,835
5.5
319
37
14.4
13.4
1.0
2008
3,398
5.51
318
38
16.0
13.1
22
2.9
-1.6
0.3
5 2005
4,818
5.5
278
72
14.6
11.3
29
3.3
2005
5,077
5.60
280
72
15.1
12.3
23
2.8
-0.5
-1.0
0.5
5 2004
2,939
5.5
262
85
13.2
11.7
13
1.5
2004
1,998
5.59
265
84
13.7
11.6
18
2.1
-0.5
0.1
-0.6
5 2003
8,940
5.5
251
96
13.0
11.1
18
1.9
2003
3,861
5.55
252
96
13.1
11.4
14
1.7
-0.1
-0.3
0.2
509
344
14
34.9
23.7
48
11.2
5.5 2010
5.5 2009
8,533
330
26
15.7
13.4
17
2.3
5.5 2009
6,279
5.85
333
23
14.9
11.8
26
3.1
0.8
1.6
-0.8
5.5 2008
22,454
320
36
17.3
15.7
10
1.6
5.5 2008
19,740
5.94
320
36
17.5
14.7
19
2.8
-0.2
1.0
-1.2
5.5 2007
3,336
305
49
20.0
17.7
13
2.3
5.5 2007
4,001
6.02
305
50
18.0
18.0
2.0
-0.3
2.3
5.5 2006
2,911
292
62
18.0
16.5
10
1.5
5.5 2006
3,124
6.06
292
61
18.7
16.5
13
2.2
-0.7
0.0
-0.7
5.5 2005
5,037
279
72
15.1
13.2
15
1.9
5.5 2005
5,514
5.97
280
72
14.8
14.9
-1
-0.1
0.3
-1.7
2.0
5.5 2004
4,992
264
85
14.8
12.0
24
2.8
5.5 2004
5,578
5.93
265
85
14.3
13.2
1.1
0.5
-1.2
1.7
5.5 2003
10,217
249
97
13.8
13.8
0.0
5.5 2003
4,544
6.01
252
96
12.8
11.7
1.1
1.0
2.1
-1.1
5.5 2010
6 2009
1,892
6.5
329
28
20.9
18.6
12
2.3
2009
285
6.43
323
28
20.6
12.7
62
7.9
0.3
5.9
-5.6
6 2008
16,071
6.5
321
35
18.9
19.5
-3
-0.6
2008
12,959
6.43
321
36
19.7
17.9
10
1.8
-0.8
1.6
-2.4
6 2007
5,280
6.5
307
48
19.7
18.3
1.4
2007
7,703
6.46
307
48
20.5
19.1
1.4
-0.8
-0.8
0.0
6 2006
4,773
6.5
293
60
19.6
17.2
14
2.4
2006
4,876
6.47
293
60
21.5
20.7
0.8
-1.9
-3.5
1.6
6 2005
1,158
6.5
277
72
14.7
14.0
0.7
2005
1,390
6.40
279
71
18.6
14.0
33
4.6
-3.9
0.0
-3.9
6 2004
2,056
6.5
263
84
13.8
12.8
1.0
2004
2,538
6.37
265
84
14.6
13.4
10
1.2
-0.8
-0.6
-0.2
6 2003
2,770
6.5
250
96
13.0
11.2
16
1.8
2003
852
6.46
253
96
13.1
13.0
0.1
-0.1
-1.8
1.7
6.5 2008
2,684
321
34
20.0
19.8
0.2
6.5 2008
4,017
6.87
320
36
20.4
17.9
14
2.5
-0.4
1.9
-2.3
6.5 2007
1,591
308
47
19.7
22.2
-11
-2.5
6.5 2007
3,075
6.89
308
47
18.9
16.9
11
0.8
5.3
-4.5
6.5 2006
1,445
295
59
17.7
17.8
-1
-0.1
6.5 2006
1,629
6.88
294
59
21.2
18.8
13
2.4
-3.5
-1.0
-2.5
12
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RBS-Rising Cuspy Coupon Prepayments

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MBS Strategy | Special Report

July Prepayment Commentary:

Rising Cuspy Coupon Prepayments

30-Year Conforming Conventional

Sarah Hu, CFA

Rate Refi: With a no-point mortgage rate of 4.82% (Freddie

Another possible explanation is refinancing down the

Figure 1: Mortgage Rates and Spreads

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Source: RBS, Freddie Mac

Assuming 30-year borrowers can refi into a 15-year

Loan Balance Monthly

Life Payment ($)

Finally, fix-30 4.5s could refi into an ARM. However, based

Figure 3: Freddie Refinance Product Transition Statistics

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Source: RBS, Freddie Mac

In addition, increased day-count and an up-tick in

15-Year Conforming Conventional

slower relative to their 30-year counterparts: Both FH-15 5s and 5.5s

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Short-Term Prepayment Forecasts

Figure 4: FNMA 30 Year Short-Term Prepayment Forecasts (by Factor Months)

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Figure 5: FNMA 15 Year Short-Term Prepayment Forecasts (by Factor Months)

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Figure 6: FHLMC 30 Year Short-Term Prepayment Forecasts (by Factor Months)

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Figure 7: GNMA-I 30 -Year Short-Term Prepayment Forecasts (by Factor Months)

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Figure 8: GNMA-II 30 -Year Short-Term Prepayment Forecasts (by Factor Months)

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Figure 9: 30-Year Prepayment Report

FHLMC 30-Year Prepayment Report

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Source: RBS, CPR/CDR

Figure 10: 15-Year Prepayment Report

FHLMC 15-Year Prepayment Report

WAC WAM WALA

WAC WAM WALA

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Source: RBS, CPR/CDR

Figure 11: GNMA Prepayment Report

GN1-GN2 GN1-GN2 GN1-GN2

WAC WAM WALA July 11 June 11

GNMA II 30-Year Prepayment Report

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

Source: RBS, CPR/CDR

MBS Strategy | Special Report | July 8 2011

The Royal Bank of Scotland

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