Prepay Commentary

March 2022 MBS Prepayment Speeds

March factors were recently released (reflecting activity in February), and prepayment speeds are now available. For the fifth consecutive month, prepay speeds broadly declined. Once again, mortgage rates increased during the window, largely explaining the decline in speeds. The average 30-year mortgage rate has increased in five consecutive months. For 15- and 30-year UMBS, 2.0%, 2.5%, and 3.0% pools saw the biggest percentage slowdowns month-over-month. For GNMA paper, G2SF 2.5% – 3.5% collateral printed the largest decreases in speeds. And for G2JM collateral, focusing on meaningful balances outstanding, 3.5% pools decreased, albeit marginally, month-over-month.

Like last month, the breadth of decreases in prepayments is what stands out from the data. From worst-to-deliver (W2D), to prepay friction collateral (low-loan balance, 100% investor property, etc.), speeds were lower across the coupon stack. There were some exceptions, of course, but these were likely due to seasonality and small balances.

Longer MBS spreads look wide by a variety of measures, even when including COVID-19 volatility

For spread-driven investors, 30-year MBS certainly look compelling. As shown in charts below, the 30-year current coupon MBS spread over the 7-year Treasury is well above 1 standard deviation over the last 12 months. Even when using a 36-month lookback (includes spread widening seen during COVID-19 volatility), 30-year MBS spreads are still 1+ standard deviation above the mean. While there’s nothing saying that spreads can’t or won’t go higher, we think it’s worth consideration.

Moving Forward – Mortgage Rates above 3.0%, but have they Peaked?

Looking ahead to next month, mortgage rates during the refi-window were once again higher than this period, which will likely keep lower coupon speeds depressed. 30-year mortgage rates have pushed beyond 3.50% and have risen on average over the last five months. Freddie Mac’s most recent reading was 3.76%, up 21bps from 3.55% in February. The lowest ever recorded rate was 2.65% in January 2021. We dipped below 3% in April 2021 and largely remained there until November. The most recent reading on 15-year mortgage rates is 3.01%, up 24bps from 2.77% last month.

Fed’s Balance Sheet relative to Bloomberg Barclays US MBS Index

Existing home supply hits another new low

Housing prices soar, rate of increase declines slightly

Prepay speeds broadly decline for fifth month in a row

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

Prepay Friction – 15-Year 2.0s of 2020

Jumbo Comparison – 2.0s remain subdued, 2.5s slower, 3.0s slower

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

Mortgage Rates – Fixed Rate decline from recent highs

What We’re Reading

CNBC: Weak mortgage demand could get a big boost as Ukraine crisis causes interest rates to drop sharply

“The expectation going into this year was that rates would move higher steadily, as the Federal Reserve eases its purchases and holdings of mortgage-backed bonds. The Fed has not made any changes to its plan for that so far, so it is possible that the drop in mortgage rates will be brief. Lower mortgage rates will continue to put upward pressure on home prices, especially given the drastic imbalance of record low supply and strong demand.”

Upcoming Webinars – (1 hour CPE available, registration opens 2 weeks prior to each webinar)

3/8 Bank: Balance Sheet Strategies in an Expected Tightening Cycle (open for registration)

3/10 Credit Union: Balance Sheet Strategies in an Expected Tightening Cycle (open for registration)

4/12 Bank: Interest Rate Swaps, Not Just for Hedging

4/14 Credit Union: Interest Rate Swaps, Not Just for Hedging