Analysts Rethinking Prepay Assumptions: 'One question posed by the credit crunch is how current market conditions will affect peak reset speeds.'.

The subprime credit crunch is prompting some in the mortgage-backed securities industry to revise assumptions about housing turnover in order to align their prepayment models with new market conditions, according to Andrew Davidson & Co.

In an article titled "Model Adjustments in Light of the Credit Crunch" in a recent issue of The Pipeline, analysts Dan Szakallas and Sanjeeban Chatterjee noted that the "staggering losses" on subprime portfolios have spurred lenders to impose tighter underwriting guidelines.

"Borrowers who may have been approved for larger loans or lower rates a year ago are seeing that the amount they can borrow, even with good credit, is less than in the past," the AD&Co. analysts said. "Coupling this with very modest home price appreciation over the last year (about 4.5%) has led to a steady decline in existing home sales every month since February."

This runs counter to the trend in a normal year, when resales rise from February to August, they noted.

"This trend was last seen in 2005 when existing home sales topped out in September at around 7.2 million units," the AD&Co. analysts said. "This year, however, we have seen the numbers drop from 6.68 million units in February to 5.75 million as of July, so it seems as though the impact of the tighter underwriting guidelines is being seen."

AD&Co. said the situation is causing some in the MBS industry to revise their housing turnover models to account for the new market conditions. "Models are overpredicting the rate of housing turnover, and it will most likely be a few months before the market corrects itself to return to historical averages," the AD&Co analysts said.

For example, the data indicate that AD&Co.'s prepayment model has been "slightly fast" in forecasting constant prepayment rates for ...