New 7.0s Lead Freddie Speed Hike

Prepayment speeds for 30-year Freddie Mac mortgage-backed securities rose for all coupons below 9.0% in the August reporting period, but the percentage gains were highest among post-1993 vintages of the 7.0% coupon, according to the Bear Stearns Prepayment Commentary.Conditional prepayment rates for those coupons were up as much as 30% in some cases. "As important as the percentage gains, however, is the fact that post-1993 7.0s are already paying at or above the spreads they reached last March, at the initial stages of this year's extended Treasury rally," analysts Dale Westhoff and Bruce Kramer said. Furthermore, the analysts noted, the reporting period ended in mid-August and therefore the prepayment numbers do not reflect August's drop of 16 basis points in the monthly average 30-year effective mortgage rate. The effective mortgage rate underlying the reported speeds was about 7.20%, a level they said falls short of making all 7.0s refinanceable. "If the effective mortgage rate stays at 7.00% for two to three weeks, all borrowers backing the 7.0% coupon will be exposed to their best-ever opportunity, pushing speeds higher across the board," Messrs. Westhoff and Kramer said.