Prepay Commentary

February MBS Prepayment Speeds

Overall, MBS prepayments declined again in January. However, we wrote last month that, “…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…. if mortgage rates stabilize here or drop further, it’s reasonable to expect increased speeds in those 4.50 pools.” Notice in the tables below that, between Fannie and Freddie 30yr MBS, the 4.5s were the only bucket to post month-over-month increases. Granted, we’re only talking a minor absolute change of +0.1 CPR for each, but when you dig down into the prepays by origination year, 2018 vintage Fannie and Freddie 30yr 4.5s both posted a change of +1.2 CPR (an increase of 20%). One month doesn’t make a trend though, so we will continue to monitor this.

Based on the Freddie Mac Primary Mortgage Market Survey, 30 and 15 year fixed-rate mortgage rates are off their recent highs by 48 and 47bps, respectively, and are both down 9 and 12bps, respectively, since last month.

(WSJ) Senate Panel Eyes Nomination of Fannie, Freddie Overseer Next Week

“If confirmed, Mr. Calabria would play a key role in shaping the Trump administration’s efforts to end the decadelong conservatorship of Fannie and Freddie, taken over at the height of the financial crisis in 2008. Ending government control of Fannie and Freddie, which back roughly half of the $10 trillion mortgage market, is Congress’s last major to-do item in the wake of the crisis.”

(WSJ) No Pay Stub? No Problem. Unconventional Mortgages Make a Comeback

During the financial crisis, many unconventional loans soured after borrowers misstated their incomes and lenders didn’t ask for documentation, earning them the nickname “liar loans.” Today, industry executives say the new unconventional mortgage, now referred to as “nonqualified” in industry jargon, has changed drastically from its crisis-era predecessor and is far safer.”

(Vining Sparks) Strategic Insight: 30-Year Fixed-Rate MBS – Tax Reform and Relative Value

“A rule of thumb is meant to be a handy guide, something to keep you “out of the ditch”. One such rule of thumb followed by many depositories is to avoid investing in 30-Year fixed-rate MBS…the rule has served depository investors well and may again in the future. Right now it deserves a closer look for two reasons, tax reform and their relative value proposition.” (For a copy, please email your Account Representative or me.)

FNMA Speeds by Vintage Year

FGLMC Speeds by Vintage Year

GNMA Speeds by Vintage Year

Non-Generic Collateral Comparison Tables

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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