NEW YORK - Tepid demand for mortgage refinancing slowed the early repayment of most U.S. bonds backed by home loans in August, with the spring rush having run its course and unlikely to resume without new record low mortgage rates.

Prepayments mostly fell last month even though mortgage rates slipped, as most homeowners who could have refinanced did so when rates were even lower in the spring, Wall Street analysts said in reports late issued late on Friday and on Tuesday.

However, faster prepays on high interest-rate loans show the Obama administration's mortgage fixes gaining slow traction.

Pegging the speed of mortgage bond prepays is critical for investors. The securities are subject to being called sooner than holders expect if sufficient numbers of borrowers repay the loans backing the bonds.

Thirty-year fixed mortgage rates averaged 5.19 percent in August. That was down from 5.22 percent in July and 5.42 percent in June, but up from 4.86 percent in May, according to Freddie Mac (FRE.N).

Rates fell as low as 4.78 percent in April, the lowest weekly level since Freddie Mac began tracking them in 1971.

The exceptions in August prepay speeds were some high-coupon bonds, backed by mortgages with high interest rates and created in years where loan standards were lax.

An increase in repayments on those securities shows that the administration's efforts to modify terms and refinance loans for struggling borrowers is gradually progressing.

The effects of these programs, and the buyback of delinquent loans by the government-controlled mortgage finance companies, surfaced in July and should accelerate.

Prepay speeds overall fell, in line with forecasts, by 18 percent in August from July, Morgan Stanley said in a report.

Prepayments on bonds backed by mortgages with lower interest rates should keep slowing in September, based on tepid refinancing activity, most analysts agree.

Housing turnover should also ebb in the fall and winter, said JPMorgan, which forecasts aggregate 30-year prepays in September to be flat to 10 percent higher than August.

In the week ended Aug. 28, the Mortgage Bankers Association's refinance applications index stood at 2,164, a far cry from the more than 6,000 reading in the spring, when rates sank to their lows.

LOAN BUYOUTS CLIMB

Among exceptions, Fannie Mae 30-year 6-1/2 percent bond prepays rose 5 percent, and prepays rose by almost 10 percent on loans made in 2007 and 2008, Morgan Stanley said.

Loans created in those years are recognized to be the lowest credit quality vintages in the 6-1/2 percent coupon, and have some of the lowest home equity.

The faster repayment of those bonds means either loan modification and refinance programs targeted at distressed borrowers are working, or delinquencies are forcing more agency buyouts, Morgan Stanley said. We believe that buyouts of delinquent loans will be a major factor for 6-1/2s going forward.

Fannie Mae (FNM.N), Freddie Mac and Ginnie Mae buy back delinquent or fraudulent loans from securities pools, and the pace should ramp up, analysts predicted. The purchases result in prepayments.

Both Fannie Mae and Freddie Mac, in their monthly business summaries, report steadily rising rates of serious delinquency on loans they guarantee.

As loan terms are altered under the federal mortgage modification program, known as HAMP, Fannie and Freddie will typically buy those mortgages out of bond pools, resulting in a prepayment.

The sharp acceleration in 6-1/2s and 7s is strong evidence that delinquency buyouts are ramping up as we had expected, Derek Chen of Barclays Capital wrote. Over the next few months, buyouts should continue to increase, accounting for a growing share of overall prepayments.

JPMorgan looks for a steady increase in buyouts rather than a spike, though the impact on individual mortgage bond pools could be significantly more pronounced. (Reporting by Lynn Adler; Editing by Dan Grebler)

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