Bear Stearns stated Alt-A prepayments in the current environment appear somewhat more unpredictable compared to previous experience.
Analysts report that this phenomenon might be the result of the recent spate of mortgage market product innovation, specifically, hybrids and IOs. These products, created to extend affordability to borrowers, are probably being targeted specifically towards Alt-A borrowers, according to Bear Stearns. From the lender's perspective, the rate premium typical in the traditional Alt-A sector makes these borrowers good candidates for refinancing into an "affordability" product. Specifically, Bear Stearns said accelerated Alt-A speeds in recent months could be explained by new product innovation.
However, the continued existence of these prepayment anomalies in the sector is contingent on "affordability" products remaining attractive to existing Alt-A borrowers and Alt-A collateral not saturating the market. Analysts cannot put a definite time limit on how long these events might persist, but they believe that Alt-A prepayment anomalies might occur for at least a few more months. As rates rise, the Alt-A sector might be one segment where mortgage bankers can still compete for refi customers, Bear Stearns added.
Alt-As are not alone in seeing faster prepayments. In a recent report, UBS analyst Glenn Boyd wrote that many alternative products - such as Alt-A, GNMA, low-FICO and high-LTV - are currently seeing faster prepayments, after prepaying slower than generic MBS at the peaks of last year's refinancing wave.
Boyd offers three possible explanations for this phenomenon - pent up demand, burnout and the solicitation of virgin territory by originators. In terms of pent-up demand, Boyd gave the example of low-FICO borrowers who probably had some difficulty refinancing during last year's refinancing boom, but now have more of an opportunity to do so. He added that though solicitation by lenders is an important contributing factor to the faster speeds, it is hard to quantify this effect through existing data.
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