December MBS Prepayment Speeds
Overall, MBS prepayments decreased slightly in December. We wrote last month that “…to see any meaningful move in prepayment rates would seem to take a fairly meaningful decline in mortgage rates and/or changes in economic conditions.” As you will note below, we have seen a fairly large pullback in mortgage rates from recent highs. From a refinancing perspective, of which there has been very little of late, there is currently ~$150 Billion in 2018 vintage 4.50 30-year conventional (Fannie and Freddie) pools where the borrower rate is ~5.10 putting them about 55bps in the money to refinance. It takes time to work through the refinancing process, but if mortgage rates stabilize here or drop further, it’s reasonable to expect increased speeds in those 4.50 pools.
Based on the Freddie Mac Primary Mortgage Market Survey, 15 and 30 year fixed-rate mortgage rates are off their recent highs by 35 and 39bps respectively. This should be a nice reprieve for home buyers (and those looking to refinance) as the trend in mortgage rates last year were sharply higher.
“Rising rates choked off a boom in refinancings and damped the purchase market for much of 2018, slowing the pace of home-price growth. The rate on a standard 30-year mortgage tends to closely follow the 10-year Treasury yield, which also hit a seven-year high of 3.23% last fall. On Friday, it finished at 2.66%.”
“In recent years, the credit quality of FHA borrowers has declined. The average borrower had monthly debt that was equal to 43% of income in 2018, marking the sixth straight annual rise in that measure of creditworthiness, according to the FHA report. The credit score of the average borrower declined to 670, the lowest level since 2008. Credit-reporting firm Experian PLC considers scores under 670 subprime.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies