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

KSmith@viningsparks.com


Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

AHofer@viningsparks.com


INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120