Prepay Commentary

February 2021 MBS Prepayment Speeds

February factors were released last evening (reflecting activity in January), and prepayment speeds are now available. Headlines proclaim a broad slowdown, and while technically correct, it’s not quite as simple as that. Generally, coupons of 3.0 and higher saw declines, but unless the trend continues, I doubt the declines are enough to change investment strategies. Newer vintages, 2020 for example, saw speeds continue to ramp up. I have some charts below illustrating this.

Looking forward, it is likely prepay speeds remain elevated. Lower day count likely influenced speeds slower in the most recent reading. Next month’s readings will include the Christmas holiday, but it also includes the lowest mortgage rates ever recorded. The Primary/Secondary spread has leveled off recently. Unless originators are starved for production (not likely in the short-term) or have increased capacity and a desire to grow their market share at a less profitable level, it may stick around here for a while. As always, time will tell.

A Couple Notes of Interest

Existing Home Inventory Hits New Low, Homeownership Rate Cools

Speeds Remain Elevated – Newer Vintages Continue to Ramp

W2D means “worst-to-deliver” – these speeds do not include collateral such as loan balance, New York, 100% Investor, etc.

Prepay Friction – 30-Year 2.5s of 2020

Prepay Friction – 15-Year 2.5s of 2020

Jumbo Comparison – 2.0s Remain Subdued

Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening

Mortgage Rates – Rates Tick Higher off Recent Lows

Will Steeper Curve Revive the ARM Market?

What We’re Reading

Vining Sparks: MBS & Prepayment Update: Volatile 2020 Comes to an End

Last year was one for the records in the mortgage market. This presentation looks back over 2020 at what happened and how different prepay models performed over the year. Some did better than others. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Bloomberg is releasing a model update and provide some background and comparisons.

UMBS Speeds by Vintage Year

GNMA Speeds by Vintage Year

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

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