Speed Watch: Experts Surprised by Absence of Big Prepayment Rush.(mortgage-back securities)(Brief Article)

Prepayment rates for agency mortgage-backed securities were mixed in June, defying some analysts' expectations by accelerating only slightly among conventional coupons up to 7.0% and actually slowing among those of 7.5% and higher.

The speeds were slower than expected, according to the Bear Stearns Prepayment Commentary, in view of the 22% increase in the Mortgage Bankers Association of America's Refinance Index between the May and June reports and the 19-basis-point drop in the lagged mortgage rate in the same period.

"Taken together, the contrarian response of conventional cohorts at and above the 7.5% coupon level suggests a substantial burnout effect when the consumer 30-year rate is in the 6.80%-6.85% area," said Bear Stearns analysts Dale Westhoff and Bruce Kramer.

They stressed, however, that the report was "old news" in light of recent developments and predicted a "substantial upturn" in speeds in the next two reports.

"The rally in mortgage rates over the past two weeks will make refinancing much more appealing even to seasoned borrowers, as evidenced by the rise in the MBA Refi Index to 2633 last week (a 69% increase over the rate that applied to the current numbers)," the analysts said.

In the May reporting period, most agency MBS speeds slowed, though the declines were generally smaller than in the April report.

Seasoned issues among coupons in the 6.5% to 8.0% range fell by constant prepayment rates of 3 CPR on average in May, while speeds accelerated 1-3 CPR for 2001 and 2002 vintages in the 5.5% to 7.0% range.