Prepay Commentary

March 2020 MBS Prepayment Speeds

March factors were recently released (reflecting activity in February), and prepayment speeds ticked up from January for a couple reasons. First, as we wrote last month, as we enter Spring, we should expect an increase in housing turnover. Second, in terms of refinance activity, mortgage rates dropped by 15 bps during the applicable February window, approximately mid-December to mid-January.

Looking forward, over the next two months (at least), I expect prepayments to pick up, perhaps substantially for two reasons. First, housing turnover should continue to increase, the wild card here is whether the Coronavirus will materially impact a normally busy time of year. Second, mortgage rates fell an additional 10-20 bps during the window for April speeds (mid-January to mid-February). Regarding May speeds, rates fell an additional 20 bps during that applicable time frame (mid-February to current). In terms of how low rates could go, there are already 30-year 2.875% refinancings reported this week in our office.

Food for Thought

Given the recent, and sudden, decline in interest rates I want to reiterate some “best practices” when it comes to evaluating mortgage securities for purchase (or sale). The high points are below from a recent presentation.

Mortgage Rates – New All-Time Low on 30-Year

Based on the Freddie Mac Primary Mortgage Market Survey, just yesterday, the 30-year mortgage rate hit a new record all-time low of 3.29. Meanwhile, 15-year rates are at recent lows but remain 23bps higher than it’s all time low of 2.56 recorded in May 2013. If benchmark rates remain near current levels, I think it is likely that we’ll observe new lows for both in the coming months.

What We’re Reading

Bloomberg: Mortgage Brokers Hire Like Mad to Handle Demand as Rates Plunge

“Lenders are zipping through applications so fast that some expect to blow past origination records they set just last year. At Quicken Loans Inc., the nation’s largest mortgage lender, Monday was the busiest day for mortgage applications in the company’s 35-year history, said Chief Executive Officer Jay Farner.”

WSJ: Mortgage Rates Hit Record Low, but Coronavirus May Deter Buyers

“The average rate on a 30-year fixed-rate mortgage fell to 3.29% from 3.45% last week, mortgage-finance giant Freddie Mac said. Mortgage rates are closely linked to yields on the 10-year Treasury, which this week dropped below 1% for the first time following an emergency Federal Reserve rate cut.”

Prepayment Speeds


UMBS Speeds by Vintage Year

FGLMC 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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