MBS Prepayment Rates Slow Down Sharply in May.

Prepayment rates for Fannie Mae and Freddie Mac mortgage-backed securities plunged among major coupons during the May reporting period.

The constant prepayment rates of Fannie Mae 5.5% coupons fell the most in absolute terms, by as much as 15 CPR, Bear Stearns analyst Dale Westhoff reported in the Bear Stearns Prepayment Commentary.

The analyst said the speeds of "moderately seasoned" 5.5s are likely to continue slowing and may drop as much as another 20 CPR by the fall.

He also said the slowdown points to important differences in the behavior of agency MBS speeds compared with those of last year.

"Clearly, there will be no repeat of last summer's protracted refinancing event that resulted from mortgage pipeline delays," Mr. Westhoff said.

Forecasting convergence in agency prepayments, the analyst said the MBS market's refinancing exposure is "the weakest it has been since the fourth quarter of 2000, with less than 25% of the borrower universe having any incentive to refinance at all."

Mr. Westhoff said Bear Stearns expects record housing turnover to push "relative coupon prepayments" well above the levels of 2000, which he said was the last discount MBS environment.