March Prepayment Speeds
April 7, 2017
Slightly slower than expected prepayment speeds occurred last month. In nominal terms, much faster prepayments occurred in March than in February. However, technical and seasonal factors caused this increase. The calendar contributed in a big way, providing four more business days for March than for February and this difference by itself would explain over a 20% jump in aggregate prepayment speeds. The beginning of seasonal increases in home sales also impacted speeds, and while March did post the first monthly overall prepayment speed increase in six months, the increase should not be viewed as a reversal of what should be a long-term trend toward gradually slowing prepayment speeds absent a decline in mortgage rates or significant changes at the mortgage GSEs.
As should be expected for a prepayment increase induced by technical factors, the entire coupon stack and almost every sizeable cohort posted higher speeds for March than for February. Speeds for 15yr MBS increased slightly more in aggregate than 30yr MBS, approximately 25% versus 23% respectively. In fractional terms, lower coupons increased by impressive amounts, over 30% for the discount coupons, as the seasonal increase in housing turnover represented a large fraction to the slow CPRs for these coupons.
Mortgage rates held steady last month, as shown by the identical 3.99% average for 30yr conventional rates in both March and February. Since mid-November thirty-year conventional mortgage rates bounced around in the 3.875% to 4.25% range. After spending so long in their current range, mortgage rates should have little impact on application volumes and over time, refinance volumes should gradually diminish due to burnout. Over the short term, seasonal and calendar influences will likely outweigh mortgage rates in steering application volumes. Day count this month will be four less than March, more than enough to offset the seasonal increase in home sales, and April prepayment speeds should slow slightly less than they sped up in March.
Director of Investment Product Strategies