Mortgage rates hit all-time lows this week, amid a weak demand for new mortgages. But even so, according to fixed income researchers at Credit Suisse (CS), the majority of borrowers remain unable to take advantage of the exceptionally low rates that would reduce monthly payments. They find that only 38% of borrowers that could benefit from a refinance can actually do so due to a variety of barriers. In commentary released this week, the analysts wrote that 73% of 30-year fixed-rate mortgages (FRM) are “refinanceable,” meaning the new rate would be at least 50 basis points (bps) less than the old rate. But the cost to refinance is higher in the current market and only 61% of 30-year FRM borrowers could see their mortgage rate reduced by at least 75 bps, the discount needed to make it cost effective for a borrower to refinance. The pool of potential refinancers decreases even further because of stricter underwriting standards that will keep many refinancers on the sideline, keeping mortgage prepayment levels muted unless rates drop even further, the analysts wrote. But if rates continue to decline, an increasing number of borrowers that would qualify for a refinance mortgage would find it cost effective to do so, increasing prepayments. Given current averages rates of 4.75% on 30-year FRMs, Credit Suisse estimates total prepayments of Agency mortgage would total $85bn, compared to average prepayments of $71bn during the previous three months. If mortgage rates decreased further, averaging 4.25% to 4.5%, prepayments would increase to $100bn to $110bn. The increase in mortgage prepayments in relation to mortgage rates is tracked in the chart above. Strong borrowers are those with good credit scores, while weak are considered riskier borrowers. “A meaningful increase in paydowns could result if mortgage rates rally by another 25bp-30bp,” the report said. “This could have a modest adverse affect on the supply/demand outlook for Agency MBS [mortgage-backed securities].” “We estimate that the supply/demand slack in Agency MBS in 2011 worsens by $50bn to $100bn if mortgage rates rally to a range of 4.5% to 4.25%, respectively,” the report added. Write to Austin Kilgore. The author holds no relevant investments.

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