The dramatic widening in the yield spread between mortgage securities and Treasuries in recent weeks has prompted some investors to hunt for bargains in the former, but just as quickly, declining mortgage rates have revived prepayment fears, sending some investors running for safer positions.

The spread differential came about as equity markets swooned in the past three weeks, putting credit quality high on investors' list of concerns.

"Credit risk now seems to be kind of dominating what's going on not just in mortgage land but in all non-Treasury paper," said William J. Denton, vice president for secondary marketing at PNC Mortgage in Vernon Hills, Ill.

"Mortgages have suffered less than any other non-Treasury type of debt," he said.

But with fixed-rate mortgages approaching 6.5%, another wave of refinancing could well ensue. When homeowners refinance loans, investors lose income on their principal and expected interest income.

With rates at the 6.5% level, securities backed by 7.5%-rate loans are suddenly vulnerable to prepayment risk. The Mortgage Banker's Association estimated that the value of refinanceable mortgages would rise by about $900 billion, to $2.5 trillion, as the 6.5% threshold is crossed. And that does not include adjustable-rate loans that may be refinanced.

But some say prepayment fears may be overblown.

While rates are as low as they have been in the last 30 years and initial indicators point toward a pickup in refinancings, mortgage rates have "come down relatively slowly here, over the last couple of years," said Bruce R. Alpern, senior vice president and head of mortgage and asset- backed research at Donaldson, Lufkin & Jenrette.

About three of every eight borrowers obtained their current 30-year, fixed-rate mortgages within the last year, said Mr. Alpern. But while they have the incentive to refinance, it is not as strong as in 1993 when rates plummeted much faster.

Contrary to the situation in 1993, Mr. Alpern estimated that the vast majority, more than 80%, of borrowers have enough equity in their homes to be free to refinance.

Though investors are going to try to let the market settle down in the short run, said Mr. Denton of PNC, investors that are able to manage the risk better have a "golden buying opportunity here."

Astute investors will be "dollar averaging and taking some of these higher spreads now into their portfolio," he added. PNC bought $100 million of 10-1 ARMs on Friday, he said.

But the tremendous volatility in markets is "not good for a healthy industry," said Mr. Denton.

Mortgage bankers can cope by having good products, prices, and an active hedging program for servicing. "Most mortgage bankers are worried about their pipeline fallout right now," he added.

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