Prepay Commentary

April 2021 MBS Prepayment Speeds

April factors were released last evening (reflecting activity in March), and prepayment speeds are now available. Speeds broadly increased and given the lag that exists between mortgage rates moving higher and working their way through to pools (see table below), it is understandable. For the most recent reading, the average mortgage rate was only 10 bps higher than the previous month. Newer vintages, like 2020, saw speeds continue to ramp up (charts below illustrating this). I have also done a deeper look into prepayment behavior in Ginnie Mae 2.5 Jumbo pools in the 2020 vintage.

Looking Forward – Don’t Lose Sight of the Big Picture

Many investors are looking forward to next month’s speed releases, myself included. Mortgage rates have moved higher and in the May time frame will have hit over 3% and average 2.96% for the refi-window. This will push some borrowers out of the money to refinance.

At the same time, mortgage rates are still historically low. Absent this cycle, the current PMMS survey of 3.18% would still be an all-time low. It’ll be interesting to see if we start to see a bifurcation of sorts between lower and higher coupons. As always, time will tell.

Existing Home Inventory Bounces (Barely) Off All-Time Low

Speeds Remain Elevated – Newer Vintages Continue to Ramp

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 but Freddies are Ramping

A Deeper Look – 30-Year GNMA Jumbo 2.5s of 2020

This is a continuation from last month’s publication. The table below consists of substantially every 30-year GNMA Jumbo 2.50 in the 2020 vintage. There are a couple takeaways. First, there has been a large and steep ramp in these pools as borrowers refinance. Just compare the loan age with the monthly CPRs. Second, once a pool hits a “terminal” speed, they tend to slow down but not by much. Given the expected decline in prepayment activity, it will be particularly interesting what we observe next month.

Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening

Mortgage Rates – Rates Move Markedly Higher, Still Historically Low

Will Steeper Curve Revive the ARM Market?

What We’re Reading

WSJ: The Housing Market Is Crazier Than It’s Been Since 2006

“But even with house prices rising quickly, many homeowners are reluctant to sell because they worry about competing for another home in the same market, said Daryl Fairweather, chief economist at Redfin. With mortgage rates so low, many households decided to refinance last year instead of moving.”

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UMBS Speeds by Vintage Year

GNMA Speeds by Vintage Year

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

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