Prepay Speeds Are Increasing but Not As Before.(Prepay Watch)

Byline: Jennifer Harmon

According to TIB Capital Markets in Dallas, prepayments speeds since the beginning of 2009 have increased but still haven't reached levels seen during the last refinance boom during 2003-2004.

Reed Bateman, a trading assistant with the company, said the mortgage-backed securities market continues to be an attractive investment option for a bank's portfolio. He said it is important to be careful with respect to mortgage prepayments and the effect fast payment speeds may have on the yield and duration of an investment.

Mortgage rates are a bit higher than what the market saw in the first few weeks of January, but because they still remain near record lows, Mr. Reed said this is resulting in more homeowners who are considering refinancing.

"Throw in the $75 billion housing plan announced by the Obama administration that's designed to lower some of the hurdles that could keep homeowners from refinancing, and as you can imagine, we have seen prepayments pick up."

He said one reason the company didn't expect prepayments to pick up significantly was substantially lower home values vs. pre-housing crisis levels, resulting in loan-to-value ratios that were too high for the homeowner to refinance.

"You would typically need the balance remaining on your loan to be at a level no higher than 80% of the home's value. Homeowners that are having the most trouble paying their mortgages have seen their home values plummet, leading to LTV ratios much higher that 80%," according to Mr. Reed in a report that was published on the company's website.