Fitch: Recent Prime Borrowers Prepaying at Rapid Rates

Mortgages originated from 2010 and into early 2012 are seeing elevated prepayment rates as low mortgage rates continue to encourage refinance activity, ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp explained in a recent report.

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Despite the high levels of prepayment activity, the rating agency suggested ""the credit implications have been modest to date due to the high overall credit quality of the original pools.""

According to Fitch, prime RMBS mortgage pools issued since 2010 had an average conditional prepayment rate (CPR) of about 42 percent.

""This is more than twice as fast as the rates of outstanding prime loans securitized in earlier vintages,"" Fitch stated.

Generally speaking, Fitch explained high refinance activity tends lead to more ""performance volatility"" since loans remaining in mortgage pools are usually of poorer quality.

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However, Fitch is seeing a different trend this time around.

""The change in credit composition of the recent mortgage pools due to high refinancing activity has been modest and the performance of the remaining loans has been excellent,"" said Grant Bailey, managing director at the rating agency.

After comparing credit quality for prepaid loans to remaining loans, Fitch found only small differences. For example, the FICO scores for prepaid loans and remaining loans averaged 774 and 771, respectively, while the loan-to-value ratio for prepaid loans was slightly lower at 63 percent compared to 66 percent for remaining loans.

The rating agency said that as expected, prepaid loans have a higher coupon, 4.8 percent compared to 4.4 percent for remaining loans, and prepaid loans have a much higher concentration of adjustable-rate mortgages, 25 percent compared to 6 percent.

The rating agency also pointed to strong performance for the remaining borrowers, noting that out of the more than 6,000 prime loans securitized since 2010, only one loan is seriously delinquent as of the most recent reporting date.

For loans securitized in the middle of 2012 and into 2013, Fitch expects prepayment rates to be much lower.

""Stable mortgage rates are making refinancing less attractive to the newest mortgage borrowers, which should keep prepayment rates on loans originated over the last several months slower than those originated between 2010 and 2012,"" said Bailey.