In a research paper for the Federal Reserve Bank of New York, a team of economists also found that erosion of home equity because of declining prices also deterred homeowners from refinancing.

The findings reinforce what lenders have assumed all along - that people whose credit and/or home values have declined may be locked into their mortgages even when better rates become available. But the researchers noted that previous research into prepayment likelihood relied on aggregate data on pools of mortgages rather than data on individual loans.

The researchers also said the findings should be significant to Wall Street.

"The prepayment experience of otherwise similar pools of mortgage loans may be vastly different depending on their proportions of credit- and/or collateral-constrained borrowers," they wrote. "Investors should ... be concerned with both the credit histories of the homeowners represented in a particular pool of mortgages as well as trends in those credit histories over time."

Perhaps even more important, the research could prove significant in the formation of monetary policy. The constrained homeowners, they concluded, "may be less sensitive to changes in interest rates because of limited access to new credit, thereby short-circuiting an important channel by which lower interest rates improve household cash flows and stimulate the economy."

The study also suggested a partial explanation of the phenomenon of burnout - the likelihood of prepayment drops sharply on loans older than five years. As creditworthy borrowers refinance and drop out of the pools, the concentration of locked-in borrowers rises, thus sharply reducing prepayment speeds.

The authors of the research paper are Stavros Peristiani, Paul Bennett, and Richard Peach, economists at the Federal Reserve Bank of New York; and Gordon Monsen and Jonathan Raiff, principals of Mortgage Research Group in Jersey City.

They used data from Mortgage Research and TRW Redi Property Data, Anaheim, Calif.

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