Although there is not a great amount of extension risk in the mortgage-backed securities market right now, participants are still holding that possibility in their minds this week.

"The watchword this week seems to be extension risk," said J.P. Morgan mortgage analyst Greg Rosenberg.

He added that people are being cautious because hedge ratios that dealers are using are still somewhat shorter than empirical durations, and that "people might get caught off-sides if we continue to drop."

Also, a great deal of commercial bank buying has taken place during the past week, Rosenberg said.

"We also saw some money managers lightening up, and it looks like the money managers won," he noted.

Overall, mortgage securities fell along with Treasurys and spreads widened for the first time in two weeks, observers said.

"MBS might do better as volatility in rates decreases," said an MBS trader. "Swaps are probably going to narrow as well."

According to Robert Van Order, chief economist for Freddie Mac, inflation concerns "led to slightly higher interest rates this week." What's more, last week's retail sales report for September "may help fuel inflation jitters and could raise interest rates further," he said.

Last week's 30-year mortgage rate put the average principal and interest payment with 1 point on a $100,000 loan at $723.33 compared with $658.60 when the 30-year rate was 6.9% during the same week a year ago.

Stone: Out at CSFB?

In other late-breaking market news, Andrew Stone, who helped pioneer the packaging of loans in the $250 billion commercial mortgage-backed securities market, has been encouraged to resign as chairman of the real estate finance unit at Credit Suisse First Boston, sources said.

According to market reports, Stone, 42, wants to leave CSFB because the firm has cut back on real estate finance, along with other risky businesses, after losing $864 million in Russia last year. In April, Stone was replaced as head of the firm's real estate finance group and named chairman, an advisory role.

An Active Year for CMBS

Meanwhile, the Mortgage Bankers Association convention in Boston last week was abuzz with talk of industry consolidation, changing markets and general contraction for the industry as a whole.

But for CMBS, nothing unexpected has occurred during the last year, MBA officials say.

At the beginning of 1999, market prognosticators were anticipating CMBS issuance volume to be in the $55 billion to $65 billion range. Through June 30, CMBS new issuance volume stood at $34.8 billion, or 20% less than last year's record first half volume of $43.4 billion; however, this year's six-month volume is the second largest on record. If the approximate 20% reduction from 1998 during the first half of 1999 holds, volume for 1999 would be in the $60 billion to $63 billion range.

Mitchell Sabshon, president and chief executive officer of Archon Financial and vice president of Goldman, Sachs & Co., who serves as chairman of the MBA's Capital Markets Committee, offered the following perspective at the conference:

"The CMBS market is just about eight or nine years old and has been in the market during the past nine years of general economic expansion and market growth. So last year, CMBS came in at $78 billion for the year - that's outstanding. Who's not to say the market isn't really in the $50 billion to $60 billion range? Maybe that is really what the market can expect in an average year."

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