Investors currently think that 15-year collateral has become significantly more efficient in refinancing relative to its 30-year counterparts, causing spreads to widen. However, in spite of this development, 15-year product continues to offer good call protection, analysts said.

"Over the last month 15-year OAS's have widened dramatically versus their 30-year counterparts and are currently at their widest levels in over four years," reported Bear Stearns in recent research.

Bear added that the 15-year sector has cheapened compared with 30-year MBS because of the anticipated sharp rise in supply. The report said that as of last month, 15-year supply was about 32% of agency issuance, increasing from 25% in 2002 and 17% in 2001.

Bear said that investors should consider, however, that in a rate backup, 15-year MBS tends to outperform as demand for extension protection rises while supply dips. "Given our ongoing concern about extension risk in this market, we think this presents an attractive opportunity for mortgage investors," analysts wrote.

Increased refinancing efficiency?

In a related report, Goldman Sachs stated that 15-year higher coupons have widened too much versus comparable 30-year ones. Investors believe that 15-year coupons are suddenly more efficient in refinancing relative to 30-years.

"We believe the widening in 15-year higher coupons has been overdone, so we recommend moving up in coupon in 15-years," wrote analysts.

Though an initial read on recent 15-year speeds would suggest that they have increased in refinancing efficiency compared with 30-years, Goldman said that the unexpectedly faster speeds in 15-years were caused by the 15 basis points rally in 15-year primary rates versus 30-years rates that happened back in March and April. The report said that this significant decline in 15-year rates is crucial in evaluating the prepayment differences between 15s and 30s over the last few months.

"When people look at 15-year speeds, they often assume that 15-year mortgage rates are some fixed amount lower than 30-year rates," said Matthew Jozoff, author of the report. "Though they are typically some amount lower, they actually move around a lot so the rates used actually make a difference in the analysis. In looking at the speeds, you have to make sure you're looking at the right primary mortgage rate driving those prepayments."

In Goldman's analysis, 15-year are examined relative to the actual 15-year primary rate, as opposed to a rate derived from the 30-year rate. This analysis showed that the latest 15-year speeds are really not fast versus 30-years. Further, after adjusting for this difference in primary rates, it becomes clear that the 15-year vehicles still offer call protection compared to 30-years.

Goldman added that it is hard to believe 15-year MBS has suddenly become much more efficient versus 30-years since the sector is still primarily comprised of homeowners who are debt minimizers, recent refinancers from 30-year mortgages into 15-years and borrowers who have loan balances that are 15% lower on average than their 30-year counterparts.

Other analysts said that accelerated 15-year speeds are not going to be driven by hybrid rates either. In other words, lower hybrid rates are not going to make 15-year prepayments any faster. Prepayments in this sector are primarily going to be from 15-year into a 15-year, or maybe even a 15-year into a 10-year at some point. The 15-year borrower is going to be much more reactive to changes in rates.

Analysts said that a prepayment model that is not calibrated to current data would be missing out on this phenomenon. Models should have a variable that would show the difference in the behavior of 15-year mortgages originated in a steep yield curve environment and those that are originated in a flat yield curve scenario.

Less seasoned 30s

In a report released in May, JPMorgan Securities said that 15-year mortgages originated at historically low rates and a steep yield curve are probably refinancings from less seasoned 30-year loans.

JPMorgan said that these borrowers would probably behave differently compared to a 15-year borrower refinancing out of a seasoned 30-year mortgage. This is why a 30-year mortgage with an original loan size of $150,000 with a 7.0% WAC and five years worth of seasoning could refinance into a 15-year 5.1% WAC with barely $125 in additional monthly payment. This type of borrower will likely be more reactive to refinancing options compared to a traditional 15-year borrower refinancing out of a seasoned 30-year mortgage.

The firm's analysis showed that newer vintage 15-year product would probably exhibit greater callability. Analysts said that more recently gross issuance of 15-year MBS has been quite high. Since March last year, net 15-year issuance has exceeded that of total 30-year paydowns for WALA greater than 60 months.

Further, in the last few months, net issuance in the 15-year sector has gone over the total paydowns of seasoned 30-year collateral by 75%. This would suggest a larger concentration of newer 30-years refinancing into 15-years.

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