Housing Turnover Drives up Prepayment Rate.

Prepayment rates for 30-year mortgages in Fannie Mae mortgage-backed securities rose by 10% in December, driven by stronger-than-expected turnover, according to Bear Stearns & Co.

The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 12.0 CPR, up from 10.9 CPR in November, said Bear Stearns senior managing director Dale Westhoff. The aggregate speed for Freddie Mac 30-year collateral rose from 10.3 CPR in November to 11.1 CPR in December.

The speeds of discount coupons rose 5%-7% despite slowing seasonal factors, but these faster-than-expected speeds do not necessarily suggest a stronger housing market, according to Mr. Westhoff.

He said sellers have become more flexible on asking prices since the summer of 2006.

"As the housing market goes through this price discovery process, we are likely to see some rebound in home sales that counter seasonal effects," the analyst said.

In the long run, however, housing turnover and cash-out refinancing are driven by the rate of home price appreciation, he observed.

"We continue to expect home prices to stagnate through most of 2007 and discount speeds adjusted for relative coupon and seasoning to decline," Mr. Westhoff said.