As interest rates keep falling, caution is rising among buyers of mortgage securities. Institutional investors are jittery because lower rates often translate into prepayments that compromise the value of mortgage holdings.

"It's certainly a concern," said Joseph G. Syage, a director with American Re Asset Management, Florham Park, N.J. "In this environment, we're very careful about what we do."

Indeed, the 30-year fixed-rate mortgage fell to 7.26% last week, its lowest level in almost two years. The fear is that borrowers will pay off loans they received at higher rates and take out new mortgages with the current, lower rates.

Investors are especially concerned about securities backed by loans made several years ago. Consumers "are more disposed to refinancing after a couple of years have gone by and they've tackled the other priorities of homeownership," according to Peter Niculescu, mortgage research director at Goldman Sachs & Co.

More recent borrowers achieve only a marginal cost savings by refinancing, Mr. Niculescu said in a recent report.

Investors say that at times like these, they rely heavily on advice from mortgage analysts at investment banks. Their word "is very helpful to us for finding relative value," Mr. Syage said. "We'll swap from one security or another to adjust for shifts" the analysts anticipate.

Analysts do urge investors to be cautious, saying some products are expensive given current market conditions. Many plain vanilla mortgage securities are overpriced relative to benchmark investments. And derivatives, financial contracts whose value is based on interest rates and other indexes, can be extremely costly, analysts said.

But Wall Street does not expect a repeat of the early 1990s, when sharp shifts in interest rates and a refinancing boom caused investors to lose millions of dollars. "The technicals remain good," said Laurie Goodman, a managing director with PaineWebber Inc. "To create a massive refinancing hysteria you have to reach much lower levels than you did in 1993."

For one thing, investors are much more savvy and willing to ride out the market shifts, researchers said. In the early 1990s, financial institutions dominated the market, holding more than one-third of the $1.4 trillion of mortgage securities outstanding. Commercial banks, savings banks, and credit unions became skittish as rates shifted and sold off a lot of their securitized mortgage investments. Financial institutions had about 29% of the $1.9 billion of mortgage securities outstanding at the end of 1996, according to PaineWebber.

Hedge funds that closely track durations have been investing more in the mortgage market, helping to ensure stability.

Also, longer-term investors like Fannie Mae and Freddie Mac are now big buyers. The companies' portfolio holdings went from 1.5% of mortgage securities in 1992 to 10% at yearend 1996, according to PaineWebber.

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