Flat Freddie Speeds Come With Warning

Prepayment speeds for Freddie Mac mortgage-backed securities were virtually unchanged in the July reporting period, but "there are treacherous currents just below the surface," according to the Bear Stearns Prepayment Commentary.Analysts Dale Westhoff and Bruce Kramer said changes in conditional prepayment rates were generally in the 1-2 CPR range. The report "is remarkable because all sectors did nearly the same thing, albeit for different reasons," they said. Discounts "continue to be helped by the strong housing market," while declining speeds for higher coupons were "tempered this month by turnover demand, which continues to support speeds in all coupons," the Bear Stearns analysts said. They warned that it would be unwise for investors to feel complacent about prepayments. "Mortgage rates will not stay range-bound indefinitely," the analysts said. "If they do break out on the down side, there is a massive amount of product that is eminently refinanceable, and that still has high collateral factors."