Rate Rally Fuels Rising Prepay Speeds.

Prepayment rates for 30-year mortgages in Fannie Mae and Freddie Mac mortgage-backed securities jumped in February following a 70-basis-point rally in mortgage rates the month before.

The aggregate speed on 30-year Fannie Mae was a constant prepayment rate of 16.3 CPR, up 70% from 9.6 CPR in January, compared with 15.4 CPR for comparable Freddie Macs, up from 9.0 CPR in January, according to the Bear Stearns Prepayment Commentary.

"In our opinion, the prepayment speeds in this report reflect the full impact of the 70 bp rally in rates," said Bear Stearns senior managing directors V.S. Srinivasan and Dale Westhoff. "Given the low level of mortgage origination activity prior to the rally, the lag between changes in rates and the ensuing prepayment response has likely decreased."

The biggest prepayment spikes occurred in the 5.5% and 6.0% coupons in February, which recorded speed increases of more than 80%, the Bear Stearns analysts said in their latest report.

They went on to attribute the surge in speeds to "a classic 'rate lock' response" to the January rally in mortgage rates.

"The combination of the weak housing market, tighter GSE underwriting guidelines, and increased friction cost due to the new/increased delivery fees is likely to continue flattening the refinancing curve," the analysts said.

"It is important to note that the prepayment speeds in the [February] report do not reflect the full impact of the GSE changes. Moreover, the recent volatility in the mortgage basis is likely to further dampen the prepayment response."