Speed Watch: Prepayment Rates Drop Sharply on Loans with Low Rates.(Brief Article)

Speeds of new-issue 6.0%-7.0% coupons among Fannie Mae and Freddie Mac mortgage-backed securities fell sharply in the January prepayment report, reflecting the rise in mortgage rates late last year.

Prepayment rates also declined, but to a lesser degree, for the same coupons among moderately seasoned agency issues, according to the Bear Stearns Prepayment Commentary.

"The refinancing boundary was clearly evident above the 7.0% coupon where 2000 vintage 30-year 7.5s and 8.0s slowed only 5% to 15% vs. 25% to 45% declines on lower coupons that moved out of the money on the selloff in December," said Bear Stearns analysts Dale Westhoff and Bruce Kramer.

The analysts said the slowdown was greater than expected and more in line with their projections for February.

"It appears that the large mortgage bankers were still able to close many of the refinancing transactions that were clogging the mortgage pipeline in November and December," Messrs. Westhoff and Kramer said. "We had suspected that the backlog of applications could possibly delay the expected decline in speeds in the first quarter of 2002."

The Bear Stearns analysts said they believe the MBS market could still be hit by a second refi wave if mortgage rates were to fall by 50 basis points or more.

"Indeed, with the pipeline relatively clear and mortgage rates much more elastic than at the beginning of the year, the likelihood of this scenario, while still low, has increased," they declared.