March MBS Prepayment Speeds
April 6, 2018
March prepayment speeds increased across most of the MBS market. Technical factors drove most of the increase, as day count alone drove about a 10% fractional increase. This and seasonal influences fall a little short of explaining the approximately 15% fractional increase in FNMA speeds or 13% in FHLMC speeds. A similarly sized overall increase for GNMA showed less consistency with almost all cohorts accelerating but by variable amounts. ARM speeds picked up by overall amounts in line with, but greater than, fixed-rate pools, with seasoning outweighing seasonal factors for the portion of the sector consisting of hybrids still in the initial fixed-rate period.
While mortgage rates increased sharply since the beginning of the year, most of the upward movement occurred in January. Mortgage rates moved around within a more-or-less directionless fashion since early February, with conventional thirty-year quotes of 4.125% to 4.375% for most of the lock-in period pertinent to March prepayments. Consistency with much of the lock-in period pertinent to March limited mortgage rate impacts on month-to-month speed changes as did the fact that most of the mortgage population recently weathered significantly lower mortgage rates.
Springtime often motivates elevated housing activity, so upward bias from seasonal factors favors slight increases in April prepayment speeds even as mortgage rates continued to hold within a mostly consistent range for the meaningful time frame. The MBA Refi Index shows a modest down-tick of late, and refinance activity should temper the seasonal increase in housing turnover and thus limit the increase in prepayments.
Director of Investment Product Strategies