The mortgage refinancing boom is making low-credit-quality and high- loan-to-value mortgages more attractive to Wall Street investors, and could also spawn more of a market for loans with prepayment penalties, according to a top PaineWebber mortgage executive.

Subprime borrowers are less able or less inclined to refinance, and that makes securities backed by subprime loans safer for investors, said Peter Rubinstein, senior vice president mortgage strategy at the firm. "You're dealing with prepayment-challenged borrowers," he said.

When interest rates decline, he said, jumbo loans-those larger than the secondary market agencies will buy-and agency loans are the most likely to be prepaid. "Alternate A" loans, which are slightly lower than prime quality, and Ginnie Mae loans are somewhat less sensitive.

Though competition in the subprime sector has caused prepayments to surge as lenders wooed borrowers away from one another, Mr. Rubinstein said B and C loans and those for 125% of value remain the most predictable when rates go down.

Investors also have been looking into prepayment-protected paper-a new product that occupies a small market niche.

"A lot of investors realize that interest rates are extremely difficult to predict and therefore you have to think of the risks and rewards," Mr. Rubinstein said. "If you buy prepayment-protected paper, you're going to protect yourself from the downside.'

If loans have prepayment penalties, borrowers will be less inclined to prepay unless rates drop significantly, Mr. Rubinstein said. Some pools of high-LTV, B and C, and agency loans have a high proportion with prepayment penalties, Mr. Rubinstein said. These penalties help stabilize performance if rates drop, he said.

Investors can also get prepayment protection by buying specially structured bonds, Mr. Rubinstein said.

Fannie Mae claims to be the dominant securitizer of prepayment-protected paper, having issued in the last 18 months over $2 billion of securities backed by fixed-rate mortgages with prepayment penalties.

Though investors feel that the securities are fairly valued, lenders want to see them valued higher, and Fannie says the market will determine the fate of these securities.

"If they truly outperform other mortgage-backed securities in the current refinancing wave, then it will be a revisiting of value as to whether investors are willing to pay more for these," said Frank Demarais, vice president for product development.

Volume totaled $290 million in January, $370 million in December, and $145 million in November.

Investors' mounting interest in prepayment-protected paper may cause some lenders to adjust the kind of loans they make, said Dale Westhoff, senior managing director for mortgage research at Bear, Stearns & Co.

Portfolio runoff is a big concern for lenders, said George P. Miller, vice president and deputy general counsel for the Bond Market Association. When lenders make prepayment protected loans, he said, there is more chance that the loan is going to remain on the books.

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