Prepay Rates Slow Modestly Despite Rate Dip: 'Over the last few weeks, the complexion of the mortgage market has changed significantly.'.

The speeds of 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities fell modestly in January, driven by a seasonal decline in turnover that offset a 15-basis-point rally in mortgage rates, according to the Bear Stearns Prepayment Commentary.

The aggregate speed on 30-year Fannie Maes was a constant prepayment rate of 11.5 CPR, down from 12.0 CPR in December vs. 10.2 CPR for comparable Freddie Macs, down from 11.1 CPR in December, Bear Stearns analysts Dale Westhoff and V.S. Srinivasan reported.

"The biggest surprise in today's numbers was the decline in prepayments in higher coupons in the face of a significant rally in mortgage rates," the analysts said, noting that the rally exposed mainly newly originated mortgages backing 6.0% and 6.5% coupons.

"These borrowers have seen little or no home price appreciation, reducing the cash-out incentive that has been such a critical component to the prepayment response in recent years." Meanwhile, aggregate speeds for 30-year Ginnie Mae collateral declined by 9% in January. For 15-year Fannie Mae and Freddie Mac collateral, overall speeds declined by 6%, comparable to the falloff in 30-year speeds.

Prepayments in the agency hybrid sector fell "slightly more" than those of comparable fixed-rate collateral, the Bear Stearns analysts reported. Hybrid ARM speeds are "considerably slower" than a year ago, adjusted for relative coupon and seasoning.

Turning to the near-term prospects for MBS prepayment rates, the analysts predicted that the February report will show a 12%-15% decline in speeds, citing a two-day decrease in the business calendar and higher mortgage rates.

"Over the last few weeks, the complexion of the mortgage market has changed significantly," they declared. "The 30-year mortgage rate ...