July 2021 MBS Prepayment Speeds
July factors were released last evening (reflecting activity in June), and prepayment speeds are now available. As generally expected, we saw mild increases overall in prepayments. We wrote last month that prints between what we saw in May and June would be reasonable and, for the most part, that’s what broadly happened. The same as last month, the big question is will lower prepayments and/or continued declines persist? I think the data supports next month’s prints to be very similar to this month although technical factors may push them a little lower.
Looking Forward – Don’t Lose Sight of the Big Picture
In a recent presentation, I opined that prepay risk was still my primary concern even though mortgage rates had increased some. Recent market moves have done nothing to ease that concern. The benchmark 10-year Treasury has declined 6 out of the 7 past weeks, totaling 19 bps. Just this week, it is currently down another 13 bps for a total of 32 bps.
Mortgage rates are still historically low and dipped back below 3% in late April and have largely remained there, never getting more than a couple bps above 3%. The lowest ever recorded rate was 2.65% in January of this year and Freddie Mac’s most recent reading has it at 2.90%. If mortgage originators are willing to sacrifice margin for volume, it’s possible we could see lower mortgage rates than we might otherwise expect.
Existing Home Inventory Bounces (barely) Off All-Time Low
Prepay speeds increase after two-months of declines
W2D means “worst-to-deliver” – these speeds do not include collateral such as loan balance, New York, 100% Investor, etc.
Prepay Friction – 30-Year 2.5s of 2020
Prepay Friction – 15-Year 2.5s of 2020
Prepay Friction – 15-Year 2.0s of 2020
Jumbo Comparison – 2.0s Remain Subdued, 2.5s and 3.0s remain elevated
Deep Dive – 30-Year GNMA Jumbo 2.5s of 2020
This is a continuation from previous publications. The table below consist of substantially every 30-year GNMA Jumbo 2.50 in the 2020 vintage. As we’ve previously seen, it’s possible to have sustained periods of very high prepayments. Higher mortgage rates can also stop precipitous increases in their tracks. Results were mixed this month, but more pools saw prepayments increase than decline in July.
Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening
Mortgage Rates – Move lower off recent highs, solidly under 3% on most recent reading
After 5/1 hits rate advantage not seen since 2019, will flatter curve pressure?
What We’re Reading
Vining Sparks: Mortgage Market Update & Opportunities — June 2021
The past 12-months has been interesting, to say the least, for mortgage investors. Fed intervention in the market continues while economic data largely paints a positive, but complicated, picture. Home prices rose sharply while mortgage rates declined drastically and remain near all-time lows.
“The spread between primary mortgage rates and the rates on packages of loans sold to bond investors is a key proxy for future loan-sale margins. It has come down since its peak last year, but it remains about 25% above long-term historical averages and stabilized in the second quarter…”
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