Speed Watch: February Prepayment Trends Reflect Seasonal Slowdown.(Bear Stearns Prepayment Commentary)(Brief Article)

Seasonal factors, higher interest rates and fewer business days, caused prepayment rates of agency mortgage-backed securities to slow across the board in February, according to the Bear Stearns Prepayment Commentary.

The magnitudes varied, however, with seasoned issues leading the way, said Bear Stearns analysts Dale Westhoff and Bruce Kramer.

"New 7.0% conventional cohorts (2001) slowed by less than 10% in February after massive declines (in the previous) month. With fresh documentation, new cuspy pools remain quite vulnerable to the recent move to lower mortgage rates," the analysts said.

But the speeds of "moderately to fully seasoned" conventional issues fell further in the February reporting period than in January, leading the slowdown with declines of 10%-20%.

"The delayed slowing in seasoned issues is the result of longer processing times associated with seasoned loan refinancing transactions," the Bear Stearns analysts explained. "These borrowers typically require full underwriting including credit checks, re- appraisal and full title search."

The analysts pointed to the Fannie Mae and Freddie Mac seasoned 6.5% MBS issues as the "biggest surprise" of the report. The 1998 Fannie Mae vintage prepaid at a 23.6 constant prepayment rate, down from 27.2 CPR in the previous month. Its Freddie Mac counterpart paid 23.8 CPR, down from 28.4 CPR.

"After a massive 10 CPR slowdown from December to January as these issues moved outside the refinancing window, speeds in these issues were more solid than expected in February, perhaps helped by the unseasonably warm winter and recent record levels of existing home sales," Messrs. Westhoff and Kramer said.