Bear Rolls Out Japanese Prepay Model


Positioning itself for what market players say could become the second largest MBS market, Bear, Stearns & Co. recently rolled out a Japanese prepayment model.

In designing the model, Bear has discovered several characteristics of the Japanese housing market. For example, Bruce Kramer, a Bear managing director, noted that housing turnover is much slower in Japan than here.

Bear's new prepayment model compares Japan's turnover with the U.S. market. The model states that while a pool of current coupon conventional mortgages there would rise to approximately 6 CPR (constant prepayment rate), a similar pool in the U.S. market would rise to 9 CPR over 30 months.

The Bear model finds this "reflects a cultural preference of homeowners to make relatively few home purchases in a lifetime." Moreover, the Japanese usually rent until they save enough for a home and are "less likely to trade up from one home to another," Bear said.

Japan's market is larger than that of any European nation, and none of its $1.4 trillion mortgages has been securitized. In the U.S. slightly more than half of its $4.1 trillion mortgages already have been securitized.

While the buyers of the first Japanese MBS deal - Sanwa Bank priced the debut offering last week - were said to be mainly Japanese and European investors, those buyers know the U.S. MBS market and its prepayment characteristics. Thus, they also know Bear Stearns, a Wall Street player known for its prepayment expertise both domestically and abroad.

In 1997, Bear developed a prepayment model for Holland in 1997, following that up the next year with a model for Belgium. The MBS markets in both of those countries have really taken off, Wall Streeters agree.

- ES