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.
- Comparisons should be evaluated on the same basis.
- For example, don’t use Bloomberg Median for one MBS and Yield Book or BAM for another.
- Don’t solely rely on Bloomberg Median prepayment speeds.
- Use historical speeds sparingly as an indicator of future prepayments.
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
“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.”
“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.”
- The fastest 15-year UMBS cohort for the month was 2018 production 15-year 3.5s at 24.7 CPR.
- The fastest 20-year UMBS cohort for the month was 2018 production 20-year 4.0s at 26.9 CPR.
- The fastest 30-Year UMBS cohort for the month was 2018 production 30-year 4.0s at 32.3 CPR.
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies