December MBS Prepayment Speeds
December factors are out and, like we expected last month, we saw a broad decline, one of only two this year, in prepayment speeds. This was largely expected given higher mortgage rates during the appropriate refinancing window which was approximately mid-October to mid-November. Also factoring in were fewer business days and lower turnover, a seasonal event as fewer homes are sold this time of year. Next month, I expect CPRs to be stable, relatively speaking, to this month.
- The fastest 15-Year UMBS cohort for the month was 2018 production 15-Year 3.5s at a 25.6 CPR.
- The fastest 20-Year UMBS cohort for the month was 2018 production 20-Year 4.0s at a 26.9 CPR.
- The fastest 30-Year UMBS cohort for the month was 2018 production 30-Year 4.0s at a 33.8 CPR.
Food for Thought
As prepayments increased this year, many investors, depositories in specific, sought refuge in 15-Year 2% MBS at discount prices. Unlike MBS at premium prices, yields on discount-priced MBS, are enhanced by prepayments. Given the increase in activity we have seen in 15-Year 2% MBS, I thought it would be interesting to look at prepayments broken down by state. A helpful number to keep in mind is that the national 3-month average is 9.1 CPR. Of interest, the three fastest states are Montana, Oklahoma, and New Mexico; and, the three slowest payers are Vermont, Hawaii, and the District of Columbia.
Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15-year fixed-rate mortgage rates are 19 and 14 bps above their respective lows and are virtually unchanged since last month.
What We’re Reading
“The companies’ federal regulator is working on a plan that could reduce the size of Fannie and Freddie and require them to hold more than $180 billion of capital to absorb possible losses—a multiyear process likely to culminate in the raising tens of billions in cash through public offerings.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies