April MBS Prepayment Speeds
Overall, prepayments increased across the board in March. Part of the increase is seasonal as the 2019 “housing season” has kicked off in many markets, but a good portion is refinance activity as evidenced by the MBA Refinancing Index hitting a level not seen since 2016.
Notables and Thoughts
- A good example of what is most likely seasonal prepayment behavior (not rate-driven) is the increases seen in discount coupons. For example, FNMA 30yr 3s and 15yr 2.5s both saw 31% (from 5.5 to 7.2) and 26% (6.9 to 8.7) increases, respectively.
- On an absolute basis, the largest increases were in FN/FH 30yr 4.5s and 5.0s and FN 15yr 3.0s.
- GNMA 30yr 4.5s posted a 23% increase (11.4 to 14.0 CPR) with the 2018 vintage posting a 30% increase (10.2 to 13.2 CPR).
- Many of our investors favor front-cashflow CMOs. Depending on the collateral, it may be worth considering a “cut-down” coupon (e.g. 4.0 coupon off of 4.5 collateral) to lower the price and prepayment risk.
- If you would like to see projected yields on your portfolio of mortgage holdings, please reach out to your Account Representative, or myself, and we can run a Performance Profile.
Based on the Freddie Mac Primary Mortgage Market Survey, 30 and 15 year fixed-rate mortgage rates are down 86 and 80bps, respectively, from their recent highs and are approaching levels not seen since the beginning of 2018. Along with continued seasonal factors, this could point towards faster speeds next month as well.
(WSJ) The 4% Mortgage Is Back
“Just a few months ago, average rates were on the verge of hitting 5%, drying up refinancings and putting a damper on home price growth. While the housing market remains cooler than it had been at its peak, lower mortgage rates are again raising hopes for a rebound as the spring selling season gets under way.”
“Determining the fate of Fannie Mae and Freddie Mac is the top question that has roiled the housing market since the government seized the two companies in 2008 after a massive bailout to prevent their collapse during the mortgage crisis.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies