August Prepayment Speeds
September 8, 2017
Prepayment speeds accelerated across a broad portion of the MBS market between July and August. Technical factors outweighed mortgage rate trends and housing market dynamics, as mortgage rates only began their recent decent at the end of the time-frame significant to August speeds. Overall increases were pronounced: about 9% for FNMA MBS, 8% for FHLMC MBS, 11% for GNMA Is, and 8% for GNMA IIs. While less acceleration occurred across the much higher coupons than for the middle of the stack, prepayments increased almost comprehensively for collateral types and coupons.
Mortgage rates only entered the early days of their recent downward trend toward the end of the pertinent lock-in period for August prepayments. August had three more business days than July, and while a 15% increase in closing days does not necessarily directly translate into a like increase in prepayments, it exceeds the actual prepayment increases by enough to suggest other factors, including mortgage rates, had neutral or perhaps slightly negative impacts.
Mortgage rates moved upward during June, and then, in early July, started a descent that continues as an ongoing downward trend. It was not until mid-August that mortgage rates dropped below levels seen in the June bond market rally. Rates continued downward since then, reaching the lowest levels available thus far in 2017.
Although technical factors drove the August prepayment increase, recent interest rate trends suggest ongoing speeds more in keeping with the accelerated levels of August than the prior months for the in-the-money coupons. While the MBA Refi Index increased 5.1% during the most recent week, it declined 2% the prior week. And even though refinance applications are on an uptrend, the pace is unimpressive. This unimpressive increase in applications does not get portfolio managers off the hook however, as further downward interest rate movements, if they occur, would move mortgage rates deeper into territory not available to opportunistic mortgagors since before last November’s market selloff.
This month’s calendar has three less business days than August, and thus nominal speeds may be slower despite the slow acceleration in refinance activity. Meanwhile, the unfortunate influences of Hurricane Harvey and, in forward months, possibly Irma will warrant consideration in upcoming prepayment analysis and discussions, as, for geographically specific areas, the combined impacts of less voluntary refinance activity and disaster related forbearance should suppress speeds for the near term.
Director of Investment Product Strategies