The newly effective changes to the Alternative Mortgage Transaction Parity Act will have a definite impact on the mortgage market.

In a report released last Thursday, Moody's Investors Service said that The Parity Act changes would affect "state housing creditors," particularly in the subprime mortgage sector because of the relatively high amount of subprime loans with prepayment penalties.

Aside from this effect, certain segments of the Alt-A market will also be impacted. According to Moody's, the changes would decrease prepayment penalty revenues for certain "alternative mortgage" loans, such as adjustable-rate mortgages originated after June 30, 2003. Additionally, state housing creditors will also incur higher costs in complying with state and local prepayment penalty rules and regulations. This situation is compared to having a single unified set of rules.

Mostly because of a decline in prepayment penalty revenue, and without an offsetting increase in excess spread, the rating agency predicts that the size of NIM deals will decrease on average between 2.5% and 7.5%. With fewer loans that have prepayment penalties, Moody's said that prepayment rates and prepayment rate volatility will rise to some extent in subprime pools. Investors may require higher spreads, which would result in slightly higher subordination levels on subprime mortgage securitizations.

Separately, Fitch Ratings said in a release that it also expects this change to decrease the number of loans originated with prepayment penalty fees. Furthermore, prepayment penalties written into loans going forward will have reduced terms and magnitude. Fitch also said that changes in The Act will impact subprime mortgage securitizations and NIMS backed by mortgages originated as of July 1, 2003.

Fitch added there will be fewer mortgages originated with prepayment penalty fees, which will increase prepayment speeds for the affected mortgage pools. Therefore, the future excess interest cash flows are expected to be generated from a smaller pool balance.

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