Prepayment rates for Fannie Mae mortgage-backed securities rose broadly in February, prompting the Bear Stearns Prepayment Commentary to caution that the increases may adversely affect MBS pricing for 5.5% and 6.0% coupons, where the speed-up was the greatest.Bear Stearns analysts Dale Westhoff and Bruce Kramer attributed the strong showing to three factors: excess capacity in the mortgage pipeline; a doubling of application volume since early January; and "attractive" hybrid mortgage alternatives. The excess capacity "has compressed the lag between interest rates and reported prepayments to just four weeks," the analysts said. Citing the shorter lag time and the larger number of business days in March, the analysts predicted that prepayments would rise again in the next report, by about 15%, but added a caveat. "It is important to note that despite the sharp increases in today's report, the numbers are still well below where they were the first time mortgage rates hit 5.65% in March 2003," they said. Bear Stearns can be found online at http://www.bearstearns.com.

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