As prepayment speeds continue their dramatic increase, MBS observers have been citing the ever-shortening lag time between the initiation of an application and the closing - known as the "lag effect." But while this lag has certainly decreased - aided by the increasing efficiency in the processing of refi applications - some analysts contend that the lag-effect explanation may be an oversimplification.

Indeed, close scrutiny of recent prepayment data actually shows a much more complicated and varied picture than what is perceived at first blush.

According to data culled and analyzed by Countrywide Capital Markets, January prepayment speeds were extremely inconsistent, irrespective of WAC: 40% of pools paid below 1 constant prepayment rate (CPR), 56% of '99 and '00-production 7.5 pools prepaid less than 5% CPR, while 22% of the bucket prepaid at 30% CPR or faster. For Fannie 7.5 pools with an 8.29% or higher GWAC, 53% of the pools prepaid at less than 5% CPR, while 27% of the pools paid faster than 30% CPR.

"The dispersion of speeds is astonishing this month, in terms of how many pools paid very fast and how many didn't prepay at all," said Bill Berliner, senior strategist at Countrywide Capital Markets. "This implies that the lag between the application and the closing has gotten shorter. But if you have continued heavy application volume, bottlenecks start cropping up again. There is the whole notion of the process becoming more efficient, but it is actually more complicated than that."

Therefore, the idea that lags are becoming much shorter is perhaps a knee-jerk reaction to the fact that the yield curve is continuing to steepen, but over a longer period of time - say, five or six months - industry capacity may not be able to absorb all of the supply.

These potential bottlenecks are partly due to some aspects of the process that are probably unavoidable, such as the title search. While a borrower probably doesn't need an appraisal on newer loans, the lender does need to know whether there is an outstanding lien at the time of loan application. There are certain things that you just can't get around in the mortgage market.

Moreover, the pipeline is filled with applications over the next few months, and the chance for a back-up is very possible.

According to Berliner, the correlation of prepayment speeds to loan age suggests that the time period necessary to close refi applications is shorter for new loans, and increases modestly as loans age. Borrowers with newly funded loans generally have all the necessary paperwork handy, as well as a current appraisal.

Some of the other factors that may cause this dispersion in prepayment data is that smaller pools have greater dispersion than larger pools, and many applications do not close by the cut-off date, but are funded.

"This portends faster speeds coming down the pike," Berliner said.

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