Several Street ABS research pros say an acceleration of home equity loan (HEL) prepayment speeds are underway, but they are drawing different conclusions on how it will affect the spreads in the sector. Rod Dubitsky, home equity research analyst with Credit Suisse First Boston in New York, says prepayments increased 1% to 2% from March to April for the 1995-1999 fixed-rates vintages, but he doesn't foresee spreads widening as a result. Gyan Sinha, head of ABS research with Bear Stearns, also anticipates an acceleration of prepayment speeds into July, and agrees there should be little pricing change because of this. He adds that HEL premium coupon bonds traditionally trade cheaply from a fundamental perspective. Sinha adds that future HEL buyers in July will have more protection from prepayment risk because speeds should start to slow down by then, as most of the Federal Reserve easing should have taken place.
Glenn Schultz, ABS analyst with Banc One Capital Markets, has a different opinion. He believes pre-pay speeds increased by 2% to 3% between March and April, and are likely to accelerate even more as prepayment penalties expire in seasoned vintages. He anticipates HEL spreads widening as a result, because those bonds--priced at $102 or $103--trade at a relatively high dollar price in comparison to mortgage products that prepay at PAR. "If the market continues to rally, the spreads on those seasoned premium [HEL] bonds are likely to widen," he worries.
Schultz advises HEL investors to either focus on NAS bonds (Non Accelerating Senior Tranche) because those offer greater pre-payment protection, or to concentrate on buying new issues because they trade cheaper than seasoned bonds from pre-existing vintages.