While prepayments are expected to drop dramatically in the months ahead - given the decline in refinancings - there are still opportunities for investors in discounts as a result of strong turnover.

In a recent report from Bear Stearns, analysts recommended investors pay attention to the geographic factors when purchasing discounts. "There is a strong positive correlation between recent home price growth and housing turnover activity, with every 10% of home price appreciation adding almost a full CPR to the housing turnover level," they concluded. After reviewing prepayment data from 2000, as well as home price growth over the past five years, Bear Stearns predicts that housing turnover prepayments in the 2004 to 2005 period will exceed 2000's experience by about 15%.

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