Back in October, the Obama Administration extended the HARP (Home affordable refinance program) to allow homeowners to refinance if even if their mortgages were underwater. This change had a direct effect on the mortgage market. Specifically, mortgage securities with high coupons (where the homeowners were paying high interest rates) fell in value. This was because the market anticipated that a greater number of these homeowners would be able to refinance their loans at lower rates. Previously they had been unable to do so because their loans exceeded the value of their homes. I blogged about this back then and it appeared to be a classic case of negative convexity in the MBS market.
Now comes the news that the market has largely recovered. The amount of expected refinancings will fall far below those initially predicted, apparently in large part due to the decreased credit scores of many homeowners.
(note link to FT website will require you create a free account to view the article).