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Even MBS Below 6% Being 'Whipsawed' by Prepay Threat.
Rebounding mortgage rates in late March threatened to "whipsaw" 5.5% and 6.0% 30-year agency mortgage-backed securities, according to mortgage analysts at Bear, Stearns & Co.
Writing in Short-Term Prepayment Estimates, analysts Dale Westhoff, Bruce Kramer and V. S. Srinivasan said the nearly 40- basis-point surge in the average 30-year effective mortgage rate in the third week of March caused the share of outstanding mortgages that are refinanceable to fall from 90% to 73%.
"Nevertheless, another massive refinancing event is now in the mortgage pipelines," the Bear Stearns analysts said, pointing to the 30-year 5.5s and 6.0s as especially vulnerable to getting whipsawed by the rate swing.
"The 5.5% coupon has had no prior incentives, while the 6.0% has had only very marginal incentives up until now," they continued. "Most of these borrowers have already refinanced in the past year and are unlikely to face many obstacles to completing another transaction with fresh documentation available."
The analysts opined that problems related to lender capacity "may be less severe" than in the fourth quarter because "most lenders are now fully staffed and the refinancing machine is running on all cylinders. Therefore, we anticipate that lenders will work through their pipelines more quickly this time around."
In other prepayment-related news, analysts at the Merrill Lynch Global Securities Research & Economics Group recently reviewed prepayments on agency MBS backed by hybrid adjustable-rate mortgages. They concluded that hybrid ARMs prepay faster than fixed-rate mortgages when the mortgage pools are out-of-the-money.
Noting the growing popularity of hybrid ...
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Source: HighBeam Research, Even MBS Below 6% Being 'Whipsawed' by Prepay Threat.