By Isobel Kennedy

NEW YORK (MNI) – The November factor reports from Fannie Mae and
Freddie Mac were released late Tuesday afternoon and they generally
proved to be a non-event.

Prepayments on 30-year Fannie Mae mortgage loans rose only 3% to a
25.2 Conditional Prepayment Rate (CPR). Fannie Mae 15-year mortgage
prepayments were down 6% to 24.9 CPR, according to mortgage strategists
calculations.

Market sources said the uneventful prepayment reports were a relief
because it was the first time since July that prepayments did not
surprise to the upside.

Most experts expect prepayments to slow in the months ahead as
housing enters a seasonally depressed time with little home buying and
relocating taking place.

In addition, 30-year mortgage rates have been hovering around 4.00%
for some time and that could indicate two things.

One, anyone that was able to refinance to capture these
historically low rates have done so already. Or, perhaps they feel in no
rush to refinance considering the fact that the Federal Reserve has
vowed to keep interest rates low until the middle of 2013.

Next Tuesday, the New York Fed will announce how many prepayments
it expects to receive on its $840 billion mortgage portfolio in the next
30-day period. It will use those proceeds to go back into
mortgage-backed securities with lower yielding coupons. The November
factor reports will be the basis for these calculations.

Prepayments in the Fed’s portfolio were estimated at $28 billion
for the 30-day period from November 14 to December 12. That was up from
$22 billion in the period from October 14 to November 10 when interest
rates spiked slightly.

Looking ahead to prepayments for December and January, market
sources are unclear about whether the recent revisions to the
government’s HARP streamlined refinancing program will affect
prepayments very much.

The program took effect December 1 so prepayments could rise if the
mortgage servicers ramp up help to beleaguer home owners, especially
those with loan-to-values of over 125% who need the most help.

However, some mortgage experts suspect that the servicers will only
pay lip service to the HARP 2.0 plan and use any resources they have to
deal mostly with borrowers that have better credit characteristics.

Wednesday, the Mortgage Bankers Association’s Market Composite
Index, a measure of mortgage loan application volume, increased 12.8% on
a seasonally adjusted basis in the week ended December 2.

After taking a large dip in the Thanksgiving holiday week, the
Refinance Index increased 15.3% from the previous week.

The seasonally adjusted Purchase Index increased 8.3% from one week
earlier to its highest level since August 5, 2011.

“The recent improvement in the purchase application index is
encouraging,” writes Nancy Vanden Houten of Stone McCarthy Research
Associates. “Still, purchase applications remain relatively depressed
given record levels for measures of housing affordability.”

The National Association of Realtors’ housing affordability index
reached a record level of around 200 this past October, the latest data
available, after being as low as about 100 in late 2006 before the
housing and financial crisis began to fester.

“The NAR’s housing affordability index is based on home prices,
mortgage rates and income,” Vanden Houten points out. “It can’t capture
things like tight lending standards or a lack of consumer confidence in
the housing market or the economy more generally.”

Spreads in the MBS market tightened Wednesday on the muted
prepayment reports and in anticipation that prepayments will likely slow
over the next few months.

In addition, traders were relieved to note that the New York Fed
has been buying the “to-be-announced” or TBA dollar rolls this week in
order to ease funding pressures over the year-end turn.

While real money has been selling the rolls in decent size this
week, traders said the Fed buying will help easy funding pressures
during the holiday season.

Tomorrow afternoon, the New York Fed will announce how many MBS it
bought in the latest week and how many dollar rolls it executed.

** Market News International New York Newsroom: 212-669-6430 **

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