February 2020 MBS Prepayment Speeds
February factors were recently released, and prepayment speeds declined broadly from December. Part of this decline is seasonal in nature, evidenced by declines in prepayment speeds of discount mortgages. As they have no financial incentive to refinance, prepayments can largely be assumed to result from housing turnover. As we enter the spring season, we expect these to increase as turnover in housing picks up. In terms of refinance activity, mortgage rates were relatively stable during the applicable January window, approximately mid-November to mid-December. This month, prepayments look to be relatively stable again; however, once we get into March and April, I’d expect refinance activity to pick up again as 30-year mortgage rates have hit new recent lows (see below).
- The fastest 15-year UMBS cohort for the month was 2018 production 15-year 4.0s at 24.7 CPR.
- The fastest 20-year UMBS cohort for the month was 2018 production 20-year 4.0s at 25.7 CPR.
- The fastest 30-year UMBS cohort for the month was 2018 production 30-year 4.0s at 28.5 CPR.
Based on the Freddie Mac Primary Mortgage Market Survey, just yesterday, mortgage rates hit new recent lows. 30- and 15-year mortgage rates haven’t been this low since October and November of 2016, respectively.
What We’re Reading
“Last year the Treasury Department allowed the firms to begin retaining tens of billions of dollars of their earnings in order to allow them to build up a capital buffer of their own. Yet that alone won’t be enough, given the size of their balance sheets. Mark Calabria, the FHFA director, has said it would ‘probably take a decade’ to gather sufficient capital through retained earnings alone.”
“As you are well aware of by now, the transition away from LIBOR is in full-swing and building momentum as we approach the assumed 2021 deadline. As part of this transition, both Fannie Mae and Freddie Mac announced yesterday additional measures they will take as they transition away from LIBOR.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies