January Rate Drop Yields Modest Increase in Speeds.

Prepayment rates for 30-year mortgage loans in Fannie Mae and Freddie Mac mortgage-backed securities rose "modestly" in January, according to the Bear Stearns Prepayment Commentary.

The aggregate speed of 30-year Fannie Maes stood at a constant prepayment rate of 9.6 CPR, up from 9.0 CPR in December, and 9.0 CPR for comparable Freddie Macs, up from 8.4 CPR in December.

Bear Stearns senior managing director Dale Westhoff said the increase in speeds was concentrated in 2006 and 2007 vintage 5.5s and 6.0s, while speeds declined for more seasoned coupons.

"While the average six-week lagged mortgage rate of 6.14% for the current reporting cycle represented the most attractive refinancing opportunity to date for the 2006 and 2007 vintages, it is still significantly higher than the 5.6% mortgage rate that more seasoned cohorts saw during the fourth quarter of 2005," Mr. Westhoff said.

The Bear Stearns analyst said tighter underwriting guidelines and the sinking housing market "have muted the refinance response" to the decline in rates. He noted that mortgage rates had fallen 30 basis points between the November and January reporting periods.

"This drop in rates has produced a modest 5 CPR prepayment increase on 2006 [Fannie Mae] 6.0s and only a 3 CPR increase on 2006 [Fannie Maes]," Mr. Westhoff said. "Throughout the 2004/2005 period we would have expected at least a 10-12 CPR response to a similar rally in rates."

The Bear Stearns analyst said the fact that the 30-year conventional mortgage rate had dropped below 5.65% for the first time since early 2005 would lead one to expect a sharp increase in refi activity.