February MBS Prepayment Speeds
March 7, 2018
Another month, another round of slowing MBS prepayments. For the fourth month in a row, prepays declined across the board: both in-the-money and out-of-the money collateral posted slower prepays. FNMA MBS declined 6% and 7% fractionally for thirty- and fifteen-year collateral, respectively, and FHLMC collateral slowed 7% for both thirty- and fifteen-year MBS. GNMA II MBS fell 11% for thirty years and 7% for fifteen years, while GNMA I MBS for both thirty and fifteen years fell 7%. These declines were not a surprise for investors’ expectations.
Mortgage rates have increased sharply since the beginning of the year. Thirty-year fixed-rate conventional mortgage quotes ended the year around 3.90%, according to Bankrate.com; they have since increased over 40bps. Fifteen-year rates have performed similarly, ending the year around 3.20% and climbing almost 50bps since then. Increasing mortgage rates, especially a return to rates not seen since the middle of 2014 for thirty-year rates and the middle of 2011 for fifteen-year rates, continues to hamper refinancing activity, as evidenced by the MBA Refi Index. The Index ended the week of February 23rd at 1168.50, which is below the average for the past fourteen months (1331.62). Another important factor for this month’s prepayments was day count. February contained two less business days than January, which would result in a 10% decrease by itself.
With interminably increasing mortgage rates, the pool of borrowers still remaining that still have an economic incentive to refinance grows smaller. March has two more business days than February, which taken on its own would increase prepays next month by 10.5%. However, together with a weak housing market and fewer borrowers available to refinance MBS, overall prepayments should increase next month by less than the 10.5% indicated by day count.
Director of Investment Product Strategies