Claus Lund, a senior vice president a Bank of America, has an idea for a Donahue show: "Women who refinance too much and the mortgage brokers who love them."

The crack drew roars of laughter this week at the Eastern Secondary Mortgage Conference in Raleigh, N.C. But the underlying message was anything but funny.

Mr. Lund, who heads up Bank of America's secondary market operations, thinks that brokers and others pushing no-cost and low-cost refinancings have seriously hurt the industry. What's more, he said, the repercussions may be felt for the next several years.

A Cause of Prepayments

He and others say that refinancings with little upfront cost are partly responsible for the unexpectedly high prepayment rates of the past two years. The prepayments, it turn, have reduced the values of mortgage-backed securities, making it harder for lenders to sell loans.

"Fixed-income investors have been hurt by prepayments, and they will react accordingly," Mr. Lund said in an interview after his speech.

Over the next year or so, Mr. Lund believes that the spreads of mortgage-backed securities yield over Treasury yields will widen. This will happen because investors, stung by earlier prepayments, will pay less and less of a premium for mortgage-backed with coupons above market levels.

Penalties for Refinancing

Eventually, Mr. Lund said, the market will move to impose penalties on borrowers who refinance within certain periods. Such penalties, known in Wall Street argot as "call protection," are currently prohibited in many states.

"Obviously, call protection will take legislative action in many areas, and there will be strong opposition from mortgage brokers," Mr. Lund said. San Francisco-based Bank of America has already begun to include call protection in many of the mortgages it originates in California for its own portfolio, Mr. Lund said.

These mortgages typically include a five-year lockout period during which the mortgagee may only pay down 20% of the principal a year. If more is paid down, the homeowner must pay a penalty of between 3% to 5% of the mortgage's face value, he said.

Though banks and thrifts may use such devices for mortgages on their own books, a secondary market will take longer to develop, Mr. Lund suggested.

Parallel Markets Envisioned

He thinks that two parallel markets may evolve, giving the consumer a choice of taking out a traditional mortgage or a call-protection mortgage at a lower price.

"Though such a thing might be popular, I worry that such a complex market will be inefficient," Mr. Lund said. His main concern is that institutional investors will shy away from a market that they don't yet fully understand, thus making it less liquid.

On a related note, Mr. Lund said he was surprised that the market for mortgage servicing rights hasn't seen steeper declines in price. "I think that servicing is very similar to interest-only strips. It is remarkable that servicing has not fallen as much as IO's" he said.

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