Mortgage Prepayment Speeds Are Starting to Rise Again.

Prepayment rates for Fannie Mae mortgage-backed securities rose broadly in February, as coupons below 6.5% recorded greater-than-expected speed increases.

The speed-up prompted the Bear Stearns Prepayment Commentary to caution that the increases may adversely affect MBS pricing for 5.5% and 6.0% coupons, which saw average speeds rise by constant prepayment rates of 7-8 CPR for the former and 10-12 CPR for the latter.

Bear Stearns analysts Dale Westhoff and Bruce Kramer attributed the strong showing to three factors: excess capacity in the mortgage pipeline, a doubling of application volume since early January and "attractive" hybrid mortgage alternatives.

The excess capacity "has compressed the lag between interest rates and reported prepayments to just four weeks," the analysts said.

Citing the shorter lag time and the larger number of business days in March, the analysts predicted that prepayments would rise again in the next report, by about 15%, but added a caveat.

"It is important to note that despite the sharp increases in today's report, the numbers are still well below where they were the first time mortgage rates hit 5.65% in March 2003," they said. "For example, the 6.0% 2002 vintage reached 50 CPR back then vs. just 38 CPR today."

Meanwhile, in the March 2004 issue of Bear Stearns' Short-Term Prepayment Estimates, Mr. Westhoff, Mr. Kramer and V. S. Srinivasan addressed the issue of extension risk.