Speed Watch: A Harbinger of Things To Come? Prepayments Rise Again.

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities rose nearly across the board in August, with especially strong speed-ups in the 7.0% coupons.

While the speeds of new Fannie Mae 7.5s and 8.0s rose 3%-6% (and slightly more for comparable Freddie Macs), speeds shot up 13% for new Fannie Mae and Freddie Mac 7.0s, according to the Bear Stearns Prepayment Commentary.

Refinancing demand was also strong for seasoned 7.0% coupons, which recorded constant prepayment rates of 23.2 CPR among Fannie Maes and 23.1 CPR among Freddie Macs, "nearly equal to last May's peak for this cohort," said Bear Stearns analysts Dale Westhoff and Bruce Kramer.

"What is next for these cusp issues? This month's response is the tip of the iceberg for the 7.0% coupon," the analysts said. "The refinancing index has risen over 900 points since July since the average homeowner who refinanced in the current report made the decision to lock in a rate. ... It is important to note that [these] numbers do not yet reflect the August surge in the refinancing index."

Messrs. Westhoff and Kramer said recent declines in mortgage rates have made the 7.0% conventional coupon "very refinanceable" and noted that there is "virtually no burnout" in the coupon because new issues have not paid more than 22 CPR during the current cycle.

"Since the lagged 30-year rate was little changed between the July and August reporting periods, we also believe that the jump in the 7.0% coupon speed is evidence of the growing importance of hybrids in the second leg of the 2001 refinancing wave," the analysts declared. "Since March, the 5-year hybrid rate advantage vs. the 30-year fixed rate has increased from about 55 bps to the current level of 70 to 75 bps."

In the Ginnie Mae sector, speeds of new 7.5s jumped 18%, prompting the Bear Stearns analysts to speculate that the disparity between conventional and Ginnie Mae speeds suggests that Ginnie Mae servicers "are ...