Big Drop in Prepayment Rates Is Upside to Slowdown in Refis

The end of the 1992-93 refinancing boom brought with it one piece of good news for mortgage bankers: Prepayments have slowed to a trickle since then.

The lowest interest rates in 20 years and the accompanying high prepayment rate stunned the secondary market and clobbered many servicing portfolios and many holders of mortgage investments.

Today, prepayment rates have returned to normal or even subnormal. Prepayments now are prompted mostly by relocations or homeowners' trading up to a newer or larger home.

In 1994, prepayments fell to the lowest level in four years, said Dale Westhoff, an analyst at Bear, Stearns & Co.

"What was exacerbating the prepayment level was the fact that lenders were competitive and offering borrowers opportunities to refinance at virtually no cost," Mr. Westhoff said. "Now we have seen more stability."

Mr. Westhoff added that prepayment levels now differ by geographic region. Housing sales on both coasts are still relatively low, but markets are vigorous in the Rocky Mountains, Midwest, and South, he said.

Gary Bettin, senior vice president and director of mortgage operations at the mortgage unit of NationsBank Corp., said that, in the first quarter of 1995, prepayment levels were near an annual rate of 9%. During the refi boom, prepayment levels were in the double digits, he said.

"We look at the prepayment levels at our three different servicing sites," Mr. Bettin said, "and we are looking a little better than we expected."

NationsBanc Mortgage Corp.'s servicing portfolio has not been affected by the recent fluctuations of interest rates, Mr. Bettin said, because borrowers are in the interest rate area they want to be since refinancing during the boom.

At Countrywide Credit Industries, prepayments have declined to about 0.5% of the servicing portfolio per month since October. In January, the prepayment rate slipped below 0.33%, said Richard DeLeo, executive vice president, but it returned to 0.5% in March, when mortgage rates dropped slightly.

"I think because there is a sense in our borrowers that a fixed-rate loan at today's rate is more of a long-term investment," Mr. DeLeo said, many adjustable-rate loans in Countrywide's portfolio have been refinanced with fixed loans and are likely to stay there.

He said borrowers now are likely to take a home equity loan rather than refinance first mortgages because the rates they hold are favorable.

"This is wonderful news for servicers because most had to rebuild conveyance systems because of huge volumes," Mr. DeLeo said. Conveyance systems handle the paperwork necessary to transfer property titles. "Now, volumes are a third of a year ago, and we have built systems up so the staff can handle current volume very easily."

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