June MBS Prepayment Speeds
Different month, similar results. Again, mortgage prepayments posted broad increases. Regarding speeds next month, right now I think it is reasonable to expect prepays to more or less maintain current levels. In the following month though, given the recent, and somewhat sudden decline in rates, it is possible we could see further increases.
Single Security Initiative
June 3rd has come and gone, marking the “Go Live” date for the Single Security Initiative. As you may recall, this is a joint venture between Fannie Mae and Freddie Mac to issue a single, Uniform, TBA-eligible Mortgage Backed Security. Freddie Mac’s offer to exchange certain eligible securities for Mirror (UMBS) certificates began last month. If you need a refresher, here is a link to a Strategic Insight authored in March.
Notables and Thoughts
- 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 4.5s posted a 21% increase (17.7 to 21.4 CPR) with the 2018 vintage posting a 32% increase (19.2 to 25.3 CPR).
- Since many of our investors favor front-cashflow CMOs and, in effect, a front-cashflow tranche magnifies prepay speeds seen on the underlying mortgages, it may be worth considering a “cut-down” coupon (e.g. 3.5 coupon off of 4.0 collateral) to lower the price and risk to underperforming yields.
- If you would like to see projected yields on your portfolio of mortgage holdings, please reach out to your Account Representative, or myself, and we can run a Performance Profile.
Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15-year fixed-rate mortgage rates are at their lowest levels since September and November 2017, respectively. From their 2018 peaks, 30- and 15-year mortgage rates are down 112 and 108bps, respectively.
“Mortgage rates are falling unexpectedly and sharply, and that means millions more homeowners can now benefit from refinancing their loans.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies