Prepay Commentary

December Prepayment Speeds

January 8, 2018

A second consecutive prepayment speed slowdown and an approximately $6 billion decrease in monthly MBS issuance, according to SIFMA, both indicate a continued gradual decline in mortgage activity. December speeds declined slightly less than anticipated, with GNMA speeds slowing the most, while FNMA speeds fell by smaller amounts and 15yr FNMA speeds actually edging slightly higher.

Mortgage rates moved slightly higher for each of the last three months. Monthly averages show the gradual nature of the mortgage rate trend, with the Bankrate.com survey for 30yr conventional quotes only moving up 10bp, 3.76% to 3.86%, from September to December. A small prepayment slowdown occurring in seasoned MBS, including pre-harp conventional pools, suggests the Thanksgiving holiday and day count – one less day than the prior month – might have curbed prepayments as much as a small increase in mortgage rates.

January should continue the gradual trend toward slower prepayment speeds due to a combination of seasonal factors, further gradual mortgage rate increases, and a lower day-count. This trend seems likely to spill over into February as well.