Despite general optimism in the market that a recent back-up in rates would be pulling prepayments back, some experts say that speeds are still pretty resilient.

A Bear Stearns report said last week that it remains cautious on the mortgage basis. Bear said that although market conditions have been favorable for mortgages of late, a recent rally "has once again taken the mortgage rate to within striking distance of our next prepayment threshold of 7%."

Bear stated that the market is overlooking the fact that the dollar volume of mortgages that are currently exposed to a refinancing incentive is actually more than it was at the start of this year. This is considering that about $87 billion has been issued in the 30-year, 7% coupon since the beginning of 2001.

The prepayment sensitivity of these pools has caused some market players to be cautious.

"From an investor perspective while mortgages appear attractive at the current yield levels, the performance of mortgages is still going to be tied to the direction of interest rates," said Steven Point, vice president and fixed income portfolio manager at Glenmede Trust Company.

If the bond market rallies at this point, mortgages are going to come under performance pressure because refinancings would likely remain and probably accelerate. On the other hand, if yields remain high, mortgages will perform well.

Because of this uncertainty, Point said that it is probably good to be cautious about any heavy overweights in the mortgage sector at this juncture.

"There is reason to be cautious particularly with recent production in a refinancable or a near refinancable coupon," said Point.

He explained that when one looks at inventory lists and looks at prepayment speeds on specific pools-not just at the aggregate group or the average-one finds significantly fast prepayment speeds and remarkable responsiveness to rate incentives. Thus individual pools can swing from having a fairly tame prepayment pattern to a fast prepayment pattern in a short period of time.

And if rates go down to low levels, there will almost be no place to hide. In order to be safe, investors would have to buy into extremely low coupon passthroughs to feel some isolation from refinancings.

For instance, the market has seen fast speeds in pools with a 6.5 coupon. In these pools, the range of underlying loans may be fairly wide and could include some loans that are much higher than a 7% note rate, the differential goes to servicing and agency fees.

Other factors may affect the speeds in these pools such people taking advantage of improved home-equity appreciation or reducing loan-to-value ratios. However some pools may also be less responsive and are generally slower.

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