January MBS Prepayment Speeds
February 7, 2018
MBS prepayments slowed for the third consecutive month, declining for seasoned and new production and for high and low coupons. Both FNMA and FHLMC posted 12% decreases for thirty-year MBS, with fifteen-year FNMA and FHLMC slowing 5% and 4%, respectively. GNMA performed similarly, slowing by slightly greater amounts: thirty-year GNMA I and GNMA II slowed 14% and 10%, respectively, and fifteen-year GNMA I and GNMA II slowed 7% and 10%. While most projections called for a slowdown, speeds fell more than expected and the amount by which they overshot expectations exceeded recent margins of error.
For the pertinent application period, both thirty- and fifteen-year mortgage rates moved within a 30bps or less range, ending December towards the highs for the prior six months. Seasonal factors added to the braking impact of the slow upward grind in mortgage rates, and the business calendar did nothing to offset these impacts, with one less business day in December. Tax reform should have provided some borrowers incentive to refinance before the end of 2017. However, with slowly rising mortgage rates and negative seasonal influences, it seems very few borrowers took advantage of the tax incentives that disappeared at the end of 2017 with the passage of tax reform.
Mortgage rates rose sharply since the beginning of the year; both thirty- and fifteen-year mortgage rates are up 40bps. The last time mortgage rates were this high was mid-2015 for thirty year terms and the latter half of 2013 for fifteen years. Unsurprisingly, fewer and fewer applicants remain with mortgage rates in-the-money enough to justify a refinance, as evidenced by the MBA Refi Index continuing to decline. In addition, February has two fewer business days compared to January, which should result in about a 10% decrease if day count was the only determining factor. Weighing all factors involved, investors should expect slower prepayments again next month.
Director of Investment Product Strategies