Ginnie Speeds May Augur Prepay Surprises

Prepayment rates for certain Ginnie Mae mortgage-backed securities have responded quickly to declining interest rates, and "prepayment surprises" may lie ahead, according to the Bear Stearns Prepayment Commentary.Though speeds for Ginnie Mae MBS with coupons of 8% or higher were generally slower or flat, those for lower coupons "show strength across the vintage spectrum," said Bear Stearns analysts Dale Westhoff and Bruce Kramer. [Click here to see the table.] They noted that speeds for the 7.5s have not exceeded their March peaks, but said the quick response to early May's rate declines indicates "substantial pent-up demand" in the 7.5% coupon. "Despite the general downward trend in most prepayment reports since March/April, borrowers are obviously quick to take advantage of refinancing opportunities, however brief they may be," the analysts said. "As we hover at the bottom of the January-July trading range, this suggests that prepayment surprises, particularly in the cusp coupons, may be on the agenda for a few more months."