Prepay Commentary

June 2021 MBS Prepayment Speeds

June factors were released last evening (reflecting activity in May), and prepayment speeds are now available. As generally expected, we witnessed broad-based declines for the second month in a row on the back of higher mortgage rates from mid-March to mid-April. The same as last month, the big question is whether lower prepayments and/or continued declines persist. I think there is data to support slower speeds than recent history (pre-May) but seasonal factors and lower mortgage rates for the July and August windows could cause speeds to tick slightly higher. CPR prints between what we saw in May and June of this year seems a reasonable assumption which translates to approximately a 6-10% increase from this month. To that end, many investors are still focused on lower-coupon MBS, those with prepayment friction, and CMOs with cut-coupons.

Looking Forward – Don’t Lose Sight of the Big Picture

Mortgage rates are still historically low and dipped back below 3% in late April and have remained there. For some perspective, the Freddie Mac mortgage market survey has weekly data going back to April 2, 1971. That’s 2,619 weekly readings. There are only 35 readings lower than the most recent (2.99%) and they all occurred in a 46-week span between 7/16/2020 and 5/27/2021. This includes the lowest ever recorded of 2.65% on 1/7/2021.

Existing Home Inventory Bounces (barely) Off All-Time Low

Prepay Speeds Broadly Decline

W2D means “worst-to-deliver” – these speeds do not include collateral such as loan balance, New York, 100% Investor, etc.

Prepay Friction – 30-Year 2.5s of 2020

Prepay Friction – 15-Year 2.5s of 2020

Prepay Friction – 15-Year 2.0s of 2020

Jumbo Comparison – 2.0s Remain Subdued, 2.5s and 3.0s lose steam but remain elevated overall

Deep Dive – 30-Year GNMA Jumbo 2.5s of 2020

This is a continuation from previous publications. The table below consists of substantially every 30-year GNMA Jumbo 2.50 in the 2020 vintage. As we’ve previously seen, it’s possible to have sustained periods of very high prepayments. Higher mortgage rates have pushed prepayment activity down in most of the more aged pools below, stopping precipitous increases in their tracks. Interesting this month though is the 75 CPR print on the 9-months-aged pool. It is likely indicative of follow through from a period of prior lower mortgage rates.

Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening

Mortgage Rates – Move lower off recent highs, hover around 3.00%

Will Steeper Curve Revive the ARM Market?

What We’re Reading

WSJ: More Americans Take Cash From Homes

“Total home equity cashed out in the first quarter of this year is estimated at $49.6 billion, up nearly 80% from a year earlier, according to data from Freddie Mac. It is the highest level on record since 2007, but still below the $84 billion quarterly cash-out volume in 2006.”

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Bank 6/24: 2nd Quarter 2021 Bank Advisory Webinar

General 7/13: 3rd Quarter Economic Outlook Webinar

UMBS Speeds by Vintage Year

GNMA Speeds by Vintage Year

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

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