Magazine article American Banker

Wall Street Watch: Rate Slippage Stirring UpSome Prepayment Jitters

Magazine article American Banker

Wall Street Watch: Rate Slippage Stirring UpSome Prepayment Jitters

Article excerpt

As interest rates keep falling, caution is rising among buyers of mortgage securities. Institutional investors are jittery because lower rates often translate into prepayments that compromise the value of mortgage holdings.

"It's certainly a concern," said Joseph G. Syage, a director with American Re Asset Management, Florham Park, N.J. "In this environment, we're very careful about what we do."

Indeed, the 30-year fixed-rate mortgage fell to 7.26% last week, its lowest level in almost two years. The fear is that borrowers will pay off loans they received at higher rates and take out new mortgages with the current, lower rates.

Investors are especially concerned about securities backed by loans made several years ago. Consumers "are more disposed to refinancing after a couple of years have gone by and they've tackled the other priorities of homeownership," according to Peter Niculescu, mortgage research director at Goldman Sachs & Co.

More recent borrowers achieve only a marginal cost savings by refinancing, Mr. Niculescu said in a recent report.

Investors say that at times like these, they rely heavily on advice from mortgage analysts at investment banks. Their word "is very helpful to us for finding relative value," Mr. Syage said. "We'll swap from one security or another to adjust for shifts" the analysts anticipate.

Analysts do urge investors to be cautious, saying some products are expensive given current market conditions. …

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