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Longer Month Means Higher Prepay Rates

Prepayment rates on 30-year fixed-rate mortgages in Fannie Mae and Freddie Mac mortgage-backed securities increased by 21% in March, according to the Bear Stearns Prepayment Commentary.

Overall speeds on 30-year Fannie Mae collateral came in at a constant prepayment rate of 13.6 CPR for the month, up 2.4 CPR from February, Bear Stearns analyst Dale Westhoff reported. Speeds for comparable Freddie Mac mortgages averaged 11.8 CPR, up 2.1 CPR.

The biggest prepayment spikes in percentage terms were recorded in the lower coupons, as the speeds of 4.5% and 5.0% coupons rose by 30%-35%, compared with increases of about 25% for 5.5s and 15% for 6.0s and higher coupons, the analyst said.

"With 30-year mortgage rates relatively unchanged, the increase in prepayments can be attributed to a four-day increase in the business calendar and a seasonal uptick in housing turnover activity," Mr. Westhoff said.

The analyst said the one surprise in the prepayment report was "the sharp increase in speeds on the 2005 cohort," which he said is probably a response to the "significant levels of appreciation" that many homeowners have seen over the past year.

The speeds of 30-year Freddie Mac collateral continued to be slower than those of Fannie Mae mortgages across most coupons and vintages, the analyst observed, noting that Bear Stearns has long attributed these disparities to the fact that Fannie Mae pools have a higher percentage of loans with nonstandard borrower characteristics.

"These borrowers are more likely to tap the equity in their property via cash-out refinancing," which has "a large impact on speeds of discount to cuspy coupons," he said. "Not surprisingly, the difference between [Fannie Mae and Freddie Mac] is largest for the 5.5% and 6.0% coupons."

Overall speeds for 15-year Fannie and Freddie MBS collateral rose by 20%, comparable to the rise in 30-year prepayments, but the speeds of agency hybrids rose sharply and continue to prepay "significantly faster" than their fixed-rate counterparts, the analyst said.

For example, 2003 Fannie Mae 5/1 4.0s prepaid at 21.4 CPR, while comparable 30-year collateral paid around 8 CPR, he noted.

Mr. Westhoff said Bear Stearns expects the April report to show a "moderate" speed decline, reflecting a mortgage rate about 10 basis points higher and a three-day decline in business days, "partially offset by the continued seasonal pickup in housing turnover activity."

In other prepayment-related news, Standard & Poor's has unveiled what it says is the first service using cash flow analysis and modeling to evaluate prices of European structured finance securities.

The S&P Evaluated Pricing Service provides fund managers and securities firms with daily and intraday evaluations of the prices of securities - initially asset- and mortgage-backed bonds - based on collateral and cash flows, S&P said.

Peter Jones, director of European securities evaluations at S&P, said the methodology enables S&P analysts to factor in prepayment speeds as well as cash flow data and credit spreads to generate a weighted average life and valuation of each security.

"The rapid growth in securitization issuance in Europe in recent years has not been matched by the development of a liquid secondary market, and this has raised concerns about the transparency, reliability and consistency of valuing many structured bonds," Mr. Jones said. "Our new service provides an independent, rigorous and credible answer for daily valuation and mark-to-market problems within this important but thinly traded market."

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