NEW YORK - After sailing in choppy waters through 1992, mortgage-backed securities players see lower prepayments calming the market in 1993's first quarter.

Home mortgage rates have risen to nearly 8.5%, from about 7.85% in early September, slowing home refinancings and causing a corresponding drop-off in prepayments.

As a consequence, "the market will have a better chance to stabilize from the volatility it has seen this past year," said Gregg Patruno, vice president, quantitative analysis and modeling at the First Boston Corp.

Two Waves

The mortgage-backed securities market saw one refinancing wave early in January and a second after the Federal Reserve Bank cut the discount rate from 3.5%, to 3%, on July 2.

Accordingly, the refinancing index of the Mortgage Bankers Association of America, a closely watched barometer of prepayments, saw a three-week run above the 1,000 level in January, and a 12-week stretch beginning July 17. The index peaked at 1,354.1 July 24, and since Oct. 2 has dropped, falling to 768.4 recently.

"We will see it come down further, though it should stay at a relatively high level." said David Lereah, chief economist at the Mortgage Bankers Association.

The rapid rate of refinancing caused record-setting securities issuance. In October, agency pass-through issuance surged to $45.4 billion.

More important, the refinancing wave flooded investors with prepaid mortgages. First Boston's Mr. Patruno said the bulk of prepayments have come from refinancing loans.

Fully one third of all American mortgages outstanding at the beginning of 1992 will have been prepaid by the end of the year, he said.

Tide Seems to Have Ebbed

But for investors who see their dollar's value shrink in such a market, the prepayment tide seems to have ebbed.

Prepayment "speeds will slow down significantly over the next year because mortgage rates have backed up as much as 50 basis points," said Joseph Hu, senior vice president at Nomura Securities International.

With mortgage rates currently at lows not seen in nearly 20 years, however, it is likely the supply of new securities in the marketplace will rise steadily.

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