I was wondering if someone here could clear up refinancing for me… When you refinance is the mortgage taken out of the the mortgage pool and that is why contraction of the average life of the mortgage pool occurs. It seems like prepayment otherwise is not necessarily related to interest rates?

don’t necessarly think of it in terms of refinancing just think about the effect of prepayment. you prepay the loan so now you average life goes down. on a large number basis lower interest rates would be the most important factor of prepayment because nobody would prepay the loan just to get another one at the same rate

Speaking in terms of pass-throughs: Lower interest rates increases prepayment rates. This decreases the bondholders par, as he recieves principal ahead of amortization schedule. This is decreased somewhat by prepayment burnout, ie rates have been lower than currently since bond was securitized. Prepayments are bad for bondholder as they give them reinvestment risk. Bond holder will not be able to replace the yield of the refinanced portion of passthrough.