The Mortgage Bankers Associ-ation (MBA) reported that for the week ending March 26, the Refinancing Index dropped 2.6% to 4857.6 versus 4988.7 the prior week. The drop reflects the rise in mortgage rates week over week.

The marginal drop in the index is not surprising considering that rates were mostly unchanged over the week. A backup two Fridays ago was unlikely reflected in last week's Refi Index results, said Merrill Lynch. However, Merrill believes the backup in rates will cause the index to decline from the high levels seen over the past three weeks. Using a methodology that analyzes the Refi Index in terms of the Freddie Mac survey rate and the average Index WAC (weighted average coupon), analysts estimate this week to fall between 3700 and 4000. With some borrowers already in refinancing mode, the index might end up close to the higher end of this range. But Merrill expects the Refi Index to settle in the mid- to high 3000s if rates stay at current levels.

Separately, JPMorgan Securities predicts refinancing to be in the low 4000 range this week, with rates back around 5.5%.

Meanwhile, the seasonally adjusted Purchase Index dropped by 1.1% week over week to 448.9, from 443.8. The share of refinancings decreased to 62.8% of total applications from 63.1% the week before. Citigroup Global Markets said that the Purchase Index has been considerably above the levels seen just a year ago. This suggests that existing home sales and discount speeds should stay robust in the next two months.

For the April prepayment report (reflecting March activity) due out this Tuesday, analysts believe that most of the pickup in speeds will be in 30-year 5.5s. JPMorgan said that 2002 5.5s will probably prepay at 30% CPR. With the Refi Index 10% higher in February and the 3.5 extra business days in March, prepays may increase 28% for this report. However, talks that analysts had with a few originators suggest that the loan closings for March are lighter than the implied 28% increase. This probably means the differences in the number of calendar days between February and March might not reflect fully on the April report.

"We therefore revise our estimate downward, expecting the overall increase in paydowns next month to be 20% to 25%," penned analysts from JPMorgan. "Consequently, we expect prepayments on 30-year 5s to be up 15%, 5.5s up 30% to 35%, 6s up 25% and 6.5s up 10% to 15%." They added that there should be more prepayment convergence on 30-year 6s and 6.5s, and perhaps even a similar level of prepayments in the May report.

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