Prepayments on subprime mortgage-backed securities slowed in September, and it could be a sign that house price declines are preventing borrowers from taking advantage of low interest rates and refinancing into fixed-rate mortgages, according to a report by Friedman, Billings, Ramsey & Co.Nearly 75% of subprime borrowers current in July had a "compelling financial incentive" to refinance, but prepayment rates declined and defaults rose. This situation "strongly suggests that subprime borrowers are progressively less able to refinance," FBR managing director Michael Youngblood says in the report. House prices fell 1.3% from the first quarter to the second quarter in 140 metropolitan statistical areas, representing 44.3% of the U.S. housing stock. "House prices may have fallen in these areas in the third quarter sufficiently to deter subprime borrowers, especially those with second or higher liens, from refinancing," the FBR report says. The FBR report also indicates that subprime MBS issuance declined to $13.1 billion in September from $48.7 billion in September 2006. FBR can be found online at http://www.fbr.com.

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