The housing agencies will release their February prepayment reports on the evening of March 6.

Prepayments are expected to show increases of about 7% to 8% due to lower mortgage rates and higher refinancing activity during the period. Paydowns are estimated to be in the low to mid-$30 billion area.

The 30-year fixed mortgage rates influencing the February report are slightly lower versus January's report at an average of 6.15% in January versus 6.27% in December. The Refinance Index was 22% higher in January, averaging 1666 compared to 1371 in the prior month. Partially offsetting was one less collection day in February - 19 days - compared to January, which had 20 days.

Last week Merrill Lynch analysts expected prepayments for the February report to increase between 10% and 15% to $31 billion from January's $28 billion. Merrill analysts attributed the predicted increase in February prepayments to a 13-basis-point drop in the Freddie Mac survey rate and a 20% pickup rise in mortgage applications. But they acknowledged that renewed mortgage activity was offset by a loss in day count.

Merrill also noted that during the early weeks of this year, refinancing applications gained ground on purchase applications as the Freddie survey rate dropped from its December high. As a result, the lagged refinancing index gained 25% while purchases increased only 15% over the prior months.

"The extra share of refinance applications is expected to surface as slight prepayment boosts in recently originated 5.5s and 6s," Merrill Lynch analysts wrote.

Further gains are anticipated in March, helped by improving seasonals and a higher day count, while speeds in April are seen slowing around 5% due to four less collection days. Merrill Lynch analysts noted that applications in February have leveled off and have even started to drop with refinancings pushed down by rising mortgage rates. But this is offset by purchase applications edging upward with the usual seasonals and, more importantly, the 23 business days in March that should allow for a significant number of applications to be processed.

Merrill Lynch analysts added that although it is likely that prepays have seen their low for a while, they do not think prepays will go back to the levels seen in the spring and summer of last year. This is primarily because mortgage rates are significantly higher now, and potentially because the housing market has produced signs of slowing. Merrill noted that last February, the non-seasonally adjusted basic index was roughly 750, while recently it has been hovering at about 600.

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

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.