Prepay Commentary

March 2021 MBS Prepayment Speeds

March factors were released last evening (reflecting activity in February), and prepayment speeds are now available. Speeds broadly increased and, given the lag that exists between mortgage rates moving higher and working their way through to pools (see table below), it isn’t much of a surprise. Newer vintages, 2020 for example, saw speeds continue to ramp up. I have some charts below illustrating this. I have also done a deeper look into prepayment behavior in Ginnie Mae 2.5 Jumbo pools in the 2020 vintage.

Looking forward, next month (and especially May) has the potential to relay a lot of information to investors. Mortgage rates have moved higher and in the May time frame will have hit over 3%. At the same time, it is important to remember that a good number of borrowers remain in-the-money to refinance. It’ll be interesting if we start to see a bifurcation of sorts between lower and higher coupons. As always, time will tell.

A Couple Notes of Interest

Existing Home Inventory Hits New Low

Speeds Remain Elevated – Newer Vintages Continue to Ramp

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

Jumbo Comparison – 2.0s Remain Subdued

Jumbo Comparison – 2.0s Remain Subdued

A Deeper Look – 30-Year GNMA Jumbo 2.5s of 2020

The table below consists of substantially every 30-year GNMA Jumbo 2.50 that is in the 2020 vintage. There are a couple interesting takeaways. First, there has been a large and steep ramp in these pools as borrowers refinance. Just compare the loan age with the monthly CPRs. Second, once a pool hits a “terminal” speed, they have slowed down some, but not enough to matter to most and speeds can remain elevated for some time.

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

Mortgage Rates – Rates Tick Higher off Recent Lows

Will Steeper Curve Revive the ARM Market?

What We’re Reading

WSJ: 30-Year Mortgage Rate Tops 3% for First Time Since July

“Mortgage rates fell throughout most of 2020 after the Covid-19 pandemic ravaged the economy. That helped power the biggest boom in mortgage lending since before the financial crisis, fueled by refinancings. When rates hit 2.98% in July, it was their first time under the 3% mark in about 50 years of record-keeping.”

Vining Sparks: MBS & Prepayment Update: Volatile 2020 Comes to an End

Last year was one for the records in the mortgage market. This presentation looks back over 2020 at what happened and how different prepay models performed over the year. Some did better than others. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Bloomberg is releasing a model update and provide some background and comparisons.

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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