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Higher Appreciation Sparks Change in Prepay Model.
Bear Stearns & Co. recently made temporary modifications to its prepayment projections based on structural changes in the mortgage industry that the company said have helped spur home price appreciation.
In a recent Mortgage Products Special Report titled "New Mortgage Pricing Models," Bear Stearns provided two updates to its fixed-rate prepayment models.
"Recent housing and prepayment data have underscored the importance of home price appreciation as a key driver of prepayment behavior," the report said. "Our current valuation framework assumes that home prices over long periods of time outperform inflation by 50 to 75 bps consistent with historical home price data."
The Bear Stearns report noted that recent home price data have been inconsistent with this long-term historical guideline.
"While we remain comfortable with our long-term assumption, we believe that in the near term home prices are likely to maintain a high level of appreciation driven by recent structural changes in the mortgage industry (e.g., including broader access to credit provided by new affordability mortgage products)," the analysts said.
In view of this outlook, the company said it would bring short-term prepayment projections more in line with expected discount speeds by temporarily modifying the model's assumptions.
Bear Stearns said it plans "to calibrate our short-term home price assumption to the most recent OFHEO year-over-year national home price change and then revert to our long-run assumption of 3.5% over a 36-month period."
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Source: HighBeam Research, Higher Appreciation Sparks Change in Prepay Model.