With originator pipelines much more cleared than they were late last year, MBS analysts are expecting shorter lag times for refinancings and quicker reaction times to low-rate environments. Having the pipelines cleared means higher short-term speeds.

A UBS Warburg report stated that this month's prepayments make evident that mortgage bankers' backlogs have cleared. However, as processing shifts from the previous six- to eight-week lag to a more normal four- to six-week lag, "a couple week's worth of straggler loans' get swept up," said analysts. This, in effect, temporarily boosts prepayments.

However, some analysts have suggested that the closing period earlier this year was only three to four weeks or closer to three (rather than four to six as UBS had indicated). This is true, specifically for new originations.

A sustained refi wave?

In another report, Bear Stearns said that "as the pipeline clears and mortgage rates become more elastic, the market becomes vulnerable to another refinancing wave at the 4.50% 10-year Treasury level."

But is the market really expecting another refi wave? Or has the appetite for refinancings gone down after the massive boom experienced last year?

"It seems that things have been bouncing around here a little bit," said Steve Point, a fixed-income portfolio manager at Glenmede Trust Co. "You've got, for example, the Fannie Mae commitment rate back down substantially where it had peaked in December (it peaked over 7%, and now is in the 6.75% range). It looks like there is some uptick in the Refi Index relative to its lows. The expectation is there is going to be some pick-up again in refinance activity. Although if you look at past historicals, it's usually just feast or famine: it doesn't seem to hang out at moderately fast levels on a sustained basis."

Analysts said that currently the market is pricing for a fairly rapid decline in prepayments. Even though pipelines have cleared and rates have come back down, that burst of enthusiasm over refinancings may have ebbed to a considerable extent.

Meanwhile, the MBA Refi Index remains strong. Just last week, the index increased by 13.3% to 2134.9 from 1884.2 he previous week. This is why some analysts are saying that pipelines may not be cleared completely, as of yet.

Giving credence to this theory is anecdotal evidence from servicers suggesting that there were some loans that were closed as recently as this month that were probably issued in November of last year. In other words, there were still prepayments in January that were really just left over from last year.

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