In a week that was called "violent" by some analysts, refinancing risk has once again reared its ugly head. Last week's rally has altered the prepayment and supply outlook for the sector by placing primary mortgage rates within 25 basis points of their historical lows - creating similar incentives for homeowners to refinance as those seen at the height of the 2003 prepayment wave.

In a report released last Tuesday, Morgan Stanley said Monday's rally brought par-coupon yields to 4.80%, which is just 16 basis points more than the peak prepayment rates in July and August of last year. Compounding this is the mortgage origination spread (which is the difference between the effective zero-point rate to the borrower and par-coupon yields) has tightened by roughly 10 basis points since then, prompted by falling originations.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.