There has been a disagreement among Wall Street dealers on the prepayment behavior of refinance loans and purchase mortgages. While some researchers have argued that recently refinanced loans will prepay faster than new purchase loans, others take the opposite view.
RBS Dain Rauscher Senior Analyst Kevin Jackson, in a report, argued that refinance loans have prepaid faster compared to purchase loans when there was really no incentive to refinance, citing data on agency conforming loans. However, seasoned premium purchase loans usually prepay faster compared to seasoned premium refinance loans. In terms of vintage, 2003 originated 30-year loans have shown a significantly steeper seasoning ramp against 2002 and 2000 originations.
In its May Short-Term Prepayment Estimates, Bear Stearns said purchase loan MBS will probably have more extension risk compared to refinance-dominated pools. "The fundamental question becomes whether or not a refinance transaction should completely reset the aging clock, in effect, ignoring the amount of tenure and level of equity a borrower has in a property," analysts wrote. It is problematic to link WALA to housing turnover because this would suggest a dramatic drop in today's overall housing activity. For instance, loans making up the huge 2003 MBS vintage, despite the fact that the mortgages that make up this vintage are new, are actually quite seasoned. Furthermore, these homeowners were part of "the strongest bull market housing expansion in U.S. history." This is key for the MBS market, Bear Stearns said, because 70% to 75% of the loans backing the massive 2003 vintage were refinance transactions while purchase loans will likely comprise most of future pools.
JPMorgan Securities has blasted analysts who think that refinancing borrowers will turn over more slowly and season less quickly compared to purchase originations. "To us, the claim appears absurd, not only logically absurd but patently contradicted by data," JPMorgan said. "We are baffled by the belief that someone who just purchased a home (with a 30-year loan) is more likely to move than a refinancing borrower who has already been in their home for several years."
Other analysts believed that it is not whether the loan is a refi or a purchase, per se, that drives prepayments, but other borrower characteristics, such as how much equity borrowers have in their properties and their LTVs, which influence behavior. "I don't get the sense that there's a huge behavioral difference between a purchase and a refi loan in a market where there has been major refinancing activity," said an analyst. "What's really driving it are the different borrower- and property-specific variables. When those variables are factored in, whether it's a purchase or refi loan is coincidental. I do think, however, that knowing whether a loan is purchase or refi does help you gauge those variables, but without knowing when the property was actually purchased, they can only be general guides."
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