Flat home price appreciation is expected to start in 2006 and prepayment speeds are going to reflect this deceleration in 2007, analysts said. However, repricing of turnover expectations should be immediate.

Lehman Brothers estimates that discount prepayments - 50% out of the money - in a flat housing environment to be roughly 6% CPR at 30 WALA and 8% CPR at 60 WALA. Analysts were able to come to these figures through extrapolating from recent prepays from areas that have different house price appreciation and through using 1994 backup data, when appreciation in California was negative.

Analysts said that the CPR change they calculated would be gradual for two reasons. They pointed out that home price appreciation usually changes gradually. "It is extremely unlikely that we move from the recent record high HPA to a consistently flat or negative HPA environment in less than a year or even two," wrote Lehman analysts. Also, they added that even if home price growth stopped abruptly at the start of this year, the effect on prepays will be limited in the beginning.

Analysts also explained that accumulated home price appreciation makes borrowers "season" faster except for the most recent vintages. They noted the already high levels of accumulated home price appreciation in 2003 and prior vintages, making the effect of home price appreciation muted compared to newer production. Lehman analysts also said that home price appreciation also affects overall mobility through its impact on local economic activity. But this effect, though significant, takes time before it works its way through to prepayments.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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