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.
“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.”
“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.)
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies