Magazine article American Banker

Ginnie Adjustables Likely to Show Stable Prepayments

Magazine article American Banker

Ginnie Adjustables Likely to Show Stable Prepayments

Article excerpt

The following article is adapted from pone that appeared in the Aug. 20 issue of Prudential Securities' "The Mortgage and Asset-Backed Market Review."

Many investors now fear that an increase in short-term rates, together with a flattening of the yield curve, could result in a significant rise in refinancing of adustable-rate loans into fixed-rate mortgages.

In this event, there could be a significant increase in prepayments for conventional adjustable-rate mortgages.

Investors who are concerned about such a possibility should consider the slower-prepaying Ginnie Mae adjustables market, Within this market, prepayments are expected to remain relatively stable, even for newly originated, fully indexed 5.5% and 6% coupons.

Holding Steady

In contrast to the fixed-rate market, the last two years have seen relatively stable prepayments for most sectors of the ARM market.

One of the factors that has kept ARM-refinancing activity light over the last 2 1/2 years has been the decline in primary-market mortgage rates for ARMS, which has closely tracked the decline in 30-year fixed rates.

In fact, the current spread between Freddie Mac's survey of 30-year fixed and one-year adjustables is currently more than 260 basis points, well above the three-year and five-year historical averages of 243 and 213 points.

Causes for Stability

If the spread between 30-year fixed and one-year adjustable rates remains at or close to current levels, we expect ARM prepayments to remain stable for the following reasons:

* Many homeowners who take out ARMs are attracted by the low initial teaser rates that typically are offered for the first year. They include first-time buyers and others who are unlikely to refinance into a higher-coupon fixed-rate product unless short-term mortgage rates are comparable to long-term rates. …

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