While prepayment penalties definitely dampen prepayments on jumbo mortgages during refinancing waves, this effect does not appear to be fully priced into jumbo collateral, according to Salomon Smith Barney Inc. Penalty jumbos, increasingly popular, now account for $500 million per month in issuance, eclipsing agency penalty issuance.

When the mortgage markets are free from major refinancing waves, prepayments are about the same for jumbos with or without prepayment penalties. But this equality changes dramatically when the Treasury markets rally and mortgage rates fall.

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