Prepay Commentary

August 2021 MBS Prepayment Speeds

August factors were released last evening (reflecting activity in July), and prepayment speeds are now available. Last month it appeared data supported similar speeds this month but that technical factors may push them lower. Overall, what we saw this month were declines in higher coupons and small increases in lower coupons as they continue to ramp. Interesting, but not totally surprising, is that 10- and 15-year speeds were more like the prior month. It makes sense as 15-year mortgage rates have drifted lower and have set new all-time lows the past two weeks. Some observers may start to wave the burnout flag on more seasoned, higher coupons, it is still early though. It certainly gives us something to keep our eye on in upcoming releases. Next month, I think the data supports overall faster prints with lower mortgage rates, especially in the latter half of the approximate refi-window, and an extra business day. The wildcard is whether burnout is starting to appear. As always, we will know more next month.

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

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 2.77%. In regard to 15-year mortgage rates, the most recent reading is 2.10% for the second week in a row, a new all-time low dating back to August, 1991.

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

Prepay speeds largely decline, remain elevated but well below April peaks

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 overall as a group, prepayments increased slightly.

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

Mortgage Rates – 30-year solidly under 3%, 15-year sets new all-time low

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.

WSJ: Eviction Moratorium’s Renewal Squeezes Small Landlords

“Many landlords say they have no wish to keep renting to tenants who have repeatedly shown them that they cannot pay. That sentiment has sometimes been a barrier in administering pandemic rental aid. Program rules often require landlords who accept rent aid, even in partial sums, to forgo evictions for a set period. Many property owners don’t want to keep tenants with a history of not paying.”

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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