With mortgage rates recently rising above 7%, concerns are increasing over extension risk as supply and prepayments are bound to decrease substantially.

In a recent report by UBS Warburg, analysts said the past year taught the market a lot about refinancings but not a whole lot about extension risk. They added that with over 38% of the market in 6.5s or lower, a back-up in rates as well as a recession on the housing front could lead to speeds below 100% PSA.

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