July MBS Prepayment Speeds
July factors are out and, technically speaking, conventional prepayment speeds declined. However, the magnitudes of these decreases were very small in nature and considering the already-elevated levels, these declines provided premium investors with little relief. GNMA speeds were fairly stable overall, but in general they had minor increases. Regarding speeds next month, right now I think it is reasonable to expect prepays to increase for a couple reasons. First, mortgage rates have declined further since we last wrote. Second, there are more business days in which borrowers can refinance.
Notables and Thoughts
- Same as last month, if speeds continue to stay elevated, which looks likely at the moment, trading and/or diversifying into lower coupons could be beneficial.
- GNMA 30-year 4.0s posted a 5% increase (18.4 to 19.2 CPR) with the 2018 vintage posting an 11% increase (23.4 to 26.0 CPR).
- In CMOs, we have seen more investors considering “cut-down” coupon (e.g. 3.5 coupon off of 4.0 collateral) to lower the price and risk to underperforming yields.
- Given this continued and sustained decline in rates and corresponding increase in prepay speeds, it is worth looking at your projected yields, that is, the expected yield moving forward through time given current prepayment expectations as they have likely changed since your initial purchase.
- We can help you with this in a variety of ways, but one you may already be familiar with is to simply request a Performance Profile. If you’re not sure where to turn, feel free to reach out to me directly.
Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15-year fixed-rate mortgage rates are at their lowest levels since late 2016. From their 2018 peaks, 30- and 15-year mortgage rates are down 119 and 118bps, respectively.
Also interesting, according to Google Trends, interest in “Mortgage Rates” has hit levels not seen since 2016 when rates dropped and then when they subsequently rebounded.
“While most borrowers tend to refinance after several years, about 1.5 million borrowers, or 35% of those who took out their loans just last year, could benefit greatly. No surprise that refinances, also referred to as prepayments, have jumped in the past few months as rates began their swoon.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies