The Mortgage Bankers Association reported a 1.2% decline in overall application activity for the week ending Feb. 24.

The Purchase Index also fell, 1.9% to 401. This is the lowest level since the week ending Jan. 7, 2005, when the index reached 393. The Refinance Index was essentially unchanged at 1574 versus 1571 in the previous report. Expectations are for the Refinance Index to record a modest gain to over 1600 for the week ending March 3.

JPMorgan Securities analysts said the refinancing behavior implied by the Refinance Index is unclear this month. Refinancings have been trending downward when observing four-week, five-week or six-week lags, analysts said. However, the March prepayment report (reflecting February prepayment activity) covers a pivotal month with the trend reversing. The four-week lagged unadjusted MBA Refinancing Index implies an increase of 44%, the five-week lag implies a 25% increase and a six-week lag implies a decrease of 4%.

In examining the implied changes in refinancing activity since September 2005, analysts can see there has been a consistent pattern and only the magnitude has changed. Also, while the absolute level of the Refinancing Index is low, the amount of ARM-to-fixed refinancing is high. Given that it is not possible to separate ARM from fixed refinancings, it is highly likely that the MBA Refinance Index has been inflated recently.

As a result, the overall change in paydowns for the March report is very elusive. Given that less than 20% of the universe is refinanceable, the implications are quite minimal. Prepayments are expected to be within 1% CPR of last month's print. Analysts expect overall agency fixed-rate paydowns to total $34 billion, which remains steady from last month. The story is very different for the April prepayment report (reflecting March prepayments), where there are four additional collection days and seasonal turnover is usually 30% higher. Analysts expect overall agency fixed-rate paydowns to reach $50 billion in the April report.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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