Freddie Speeds Fall, But Not Risk, Analysts Say

Prepayment rates on most 30-year Freddie Mac mortgage-backed securities with coupons of 7.5%-8.5% slowed by 10%-15% in the June reporting period, according to the Bear Stearns Prepayment Commentary.Analysts Dale Westhoff and Bruce Kramer cautioned, however, that new 7.5s were 76 basis points in the money from February through May and that the 7.5% coupon "remains extremely vulnerable to brief flirtations" with lower interest rates. The 76-bp incentive "is just at the threshold for a full refinancing response, so any sustained move to lower mortgage rates would trigger an immediate reaction in this coupon," they said. The Bear Stearns analysts pointed to the fact that speeds for seasoned premium Freddie Mac MBS held strong, which they linked to the resurgence of home prices in California. They also cited surprisingly strong prepayment rates in the cusp and discount sectors. Overall, the analysts said the report confirms that "speeds will decay in a range-bound environment," but warned that it "should not be taken as a signal that prepayment risk is also declining."