Prepay Commentary |  |
July 2020 MBS Prepayment Speeds
July factors were released last evening (reflecting activity in June), and prepayment speeds are now available. Just about any way you slice the data, speeds increased across the board. We expected this last month as conditions were primed for this to occur. First, mortgage rates were nearly 20bps lower (3.28 vs 3.45) and there were two more business days during the measurement period. All the increases aren’t equal though, see the “Food for Thought” section below.
We wrote last month, “As it turns out, at least initially, COVID-19 may not have as big of an effect on prepayments as many initially expected.”. This month’s readings certainly seem to confirm that statement. In terms of prepayments for next month, I think it is likely we see CPRs speed up as mortgage rates are 7bps lower (3.21 versus 3.28) for the appropriate refi window. It is worth keeping in mind that mortgages are refinanced at the margin, not the average. For example, while the current average is 3.07 (see Mortgage Rates section below) there are conventional loans in pools with sub-3% rates.
Food for Thought – Loan Balance Pools
As the Fed has driven prices higher on MBS, many investors have looked for ways to mitigate, or at least decrease, the prepayment risk inherent in MBS bonds. One of those ways is to look at specified pools with lower loan balances than a more generic pool. Mathematically (and intuitively) we know a lower loan balance, all else equal, requires a larger rate decrease for a refinance to make economic sense for the borrower. There is also history to support this. For example, if we consider 30-year 3% MBS issued in 2018 (FNCL 3 – 2018) against “loan balance” pools of the same vintage. Consider the 30-year 3% MBS issued in 2018 with a maximum loan size of $125,000 (FNCL 3 – 2018 LB 125). For the most recent reading, the generic 30-year 3s of 2018 had a trailing 3-mo CPR of 40.1 compared to 8.4 for the “125K max” pools issued in the same year. Yes, there is a “pay-up” associated with loan balance pools. However, given what we know coupled with historical evidence, the pay-up could be worthwhile as a form of insurance against prepayments.
Forbearance Data
We started reporting forbearance data last month when it became available for Conventional pools. We have included the data in our main tables and in the detailed reports linked at the bottom of this publication. A few points to keep in mind, forbearance data will not completely tie together with delinquency data for a couple reasons. First, there is a timing difference in how the data is collected. Second, it is possible for a borrower to opt into a forbearance plan but to keep making full or partial payments. Lastly, forbearance and delinquency are overlapping data, e.g. if a borrower is in forbearance and has missed two consecutive payments, they will also show in the 60-day delinquency bucket.
Notables – Excludes vintages of marginal size
- The fastest 15-year UMBS cohort for the month was 2018 production 15-Year 3.5s at 43.3 CPR.
- The fastest 20-year UMBS cohort for the month was 2018 production 20-Year 4.0s at 47.9 CPR.
- The fastest 30-year UMBS cohort for the month was 2018 production 30-Year 4.0s at 56.9 CPR.
Mortgage Rates – Freddie Mac Primary Mortgage Market Survey
What We’re Reading
Freddie Mac: Mortgage Rates Hit All-Time Record Low Heading Into Holiday Weekend
“…showing that the 30-year fixed-rate mortgage (FRM) averaged 3.07 percent, the lowest rate in the survey’s history dating back to 1971.”
Housing Wire: Foreclosure threat grows as COVID-19 surges, Fed says
“The beefed-up unemployment benefits have kept forbearance rates lower than some of the most pessimistic forecasts of 20% to 30%, the paper said.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Vining Sparks
Adam Hofer
Analyst, Investment Product Strategies
Vining Sparks