Prepay Rates Edge Up on October Rate Drop.

The speeds of 30-year Fannie Mae and Freddie Mac mortgage-backed securities rose moderately in October on the heels of a mortgage rate decline of 17 basis points.

According to Bear Stearns analyst Dale Westhoff, the results "show the classic symptoms of burnout: new issues increased more than seasoned issues while lower cuspy coupons were more responsive than higher coupons."

Mr. Westhoff noted that the speeds of 2004 MBS rose by over 20%, while those of earlier vintages increased considerably less. Most of the aggregate prepayment rise is attributable to the speed-up in the 5.5% coupon, he said.

Overall, the refinancing curve continued to flatten out, as coupons of 6.5% and below speeded up moderately and higher coupons slowed somewhat.

"Without a catalyst to unleash a significant refinancing event, the higher coupons are clearly exhibiting more burnout than they have over the last two years," Mr. Westhoff said. "Nevertheless, we feel that if mortgage rates were to enter the 5.60% to 5.40% corridor, exposing the 5.5% coupon, the observed burnout in recent months would be greatly diminished."

Ginnie Mae MBS speeds continued to exceed those of conventionals across the board in October, Mr. Westhoff reported, but with wider gaps in 2003 and 2004 vintages.

The Bear Stearns analyst predicted that the prepayment pattern in the November report will be similar to that of October, with most increases centered in the 5.5% coupon.