Jumbo collateral has the ability to prepay at fast speeds going forward, analysts at JPMorgan said in a recent report.

They said that the refinancing efficiency in Jumbos is borrower- and lender- driven. Mortgage bankers are currently at full capacity and would much rather process Jumbos instead of conforming applications. Additionally, wealthy borrowers have had depressed stock portfolios over the last three years and are actually quite eager to save on mortgage costs by refinancing more aggressively. This desire has, in turn, resulted in faster prepayments on Jumbo product.

The no-point 30-year Jumbo rates have stayed in the 6.25% range during the last three months. Aside from this, mortgage rates in December 2001 were roughly over 50bps, and stayed at that level for only two weeks. This has caused prepayment reactivity of Jumbo collateral to be significantly greater in 2003 compared with the end of 2001. For the most part, refinancing on 12 WALA mortgages and newer Jumbos will likely be into another 30-year mortgage. Increased prepayment reactivity on 19 to 24 WALA Jumbo collateral could be partly explained through the refinancing down the yield-curve into hybrids. The firm told investors to beware of expecting a prepayment slowdown in the event of a backup.

At current rates, Jumbo collateral has the potential to prepay at a fast pace for quite a while yet, analysts stated. The wide differential between primary and secondary mortgage rates could lead to sticky rates in a backup. The firm does not really believe that a major prepayment slowdown can happen on Jumbos unless rates backup roughly 100 bps.

Potential acceleration on any rally without a corresponding slowdown on a backup is a risk on all high premium mortgages, but is even more pronounced on Jumbo collateral, they explained. This could be difficult for Jumbo prepayments because it has resulted in the relative cheapening in Jumbo IOs. They added that Jumbo IOs have now been battered enough and offer an attractive risk-reward profile.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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