Unexpectedly strong prepayment reports issued last week by Fannie Mae and Ginnie Mae knocked the wind out of the mortgage-backed market, particularly the premium coupon sector, and Ginnie Mae bonds had the toughest time of all.

"We were hit hard we weren't expecting those kinds of prints," said an MBS pass-through trader who saw Ginnie 8s and 8.5s trail by three and six basis points, respectively.

Meanwhile, the interest-only (IO) market was down three-quarters of a point as a result of the prematurely fast speeds.

Near close last Wednesday, when the prepayment reports were released, prices were off four to seven ticks in 30-year GNMA 8s and 8.5s, and down three and unchanged in similar coupon conventionals. Prices on discounts, on the other hand, were higher, as investors moved down-in-coupon. However, sources indicated that underperformance in GNMA's was offset by better performance in conventionals.

The prepayment reports came as a huge surprise, as the increases were one month early, sources said. Analysts generally expected a dramatic increase in February's report, with peaks in the March release. However, further efficiencies in the refi process and mortgage banker access to fresh paperwork on new purchase originations from 1999 and 2000 cut down on the lag time, according to researchers at Bear Stearns.

Another concern expressed by Bear Stearns is the fact that 6% and 6.5% pools being formed today are backed primarily by 1999-2000 7.5%-8.5% MBS. These borrowers have not been in their homes as long as the refinancer of 1998, which increases the extension risk in these coupons in the event of a sell-off.

In other observations about the prepayment reports, Bear expects the substantial speed gap between new and seasoned vintages to continue unless mortgage rates move significantly below 7%. In Freddie Mac's latest mortgage rate survey, 30-year mortgage rates dropped 11 basis points to 6.98% for the week ending Feb. 9.

The drop below the 7% psychological level is sure to send the MBS Refi Index even higher, analysts said. Last week, the market received a double whammy of a 30% gain in the Index, and faster-than-expected increases in the prepayment reports for new vintage premiums. With mortgage rates declining, this could keep new vintage speeds at least at peak levels for the following report.

Mortgages got their third strike in the form of the FHLMC mortgage rate survey. Following the prior week's drop to 7.09% from 7.15%, refis surged over 30% to 2612. The current level is only 7% from the high reached this year of 2800. In a press release, FHLMC's economist, Robert Van Order, noted that Freddie Mac's AUS saw a record 506,000 loan evaluations in January, 62% higher than last January. In addition, he suggested that borrowers' perceptions are for further declines in rates on future Fed cuts.

"It is just a lot easier to close a refinancing these days," said an MBS analyst. "With this latest report, obviously it took between two to three weeks to close these refinancings, assuming this is the mid-January spike in applications coming to market."

"This is just a very dynamic market," added a veteran MBS researcher. "A lot is changing for this 2001 refi wave, including people's perception of the markets, news coverage, as well as many other factors. This is the 2001 wave, and it is different than the 1998 wave, which was different than the refi wave that came before that."

Although the speeds logged for Fannie Mae bonds were not necessarily unprecedented, the quick reaction to the prepayment reports this time around was definitely noticeable. "This is definitely surprising, and there was quicker reaction than was anticipated," said David Montano, director of MBS research at Credit Suisse First Boston. "It was out of line with the data from mortgage bankers, although the 15-year numbers were in line with expectations. Ginnie Maes certainly caught the market by surprise."

Montano also said that constant prepayment rate (CPR) speeds for Ginnies could reach the 50 CPR level next month.

"A lot of people were saying that this refi wave was going to be softer than 1998. With market mood as it is now, that is not the case," Montano said.

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