May 2021 MBS Prepayment Speeds
May factors were released last evening (reflecting activity in April), and prepayment speeds are now available. As generally expected, we witnessed broad based declines on the back of higher mortgage rates from mid-February to mid-March. Even mortgages likely still in-the-money to refinance slowed down but that might be a function of two fewer business days or waiting to see if mortgage rates will decline. The big question is whether lower prepayments stick around. I think there is data to support slower speeds next month and July’s will likely remain lower than recent history. Outside of that, it takes a crystal ball on mortgage rates. Many investors are still focused on lower-coupon MBS, those with prepayment friction, and CMOs with cut-coupons.
Looking Forward – Don’t Lose Sight of the Big Picture
Next month will be an interesting read on prepay speeds and will be the product of the highest mortgage rates in the last twelve months. During the applicable refinance window, mortgage rates will have averaged approximately 3.14%. This is an even bigger disincentive to refinance than existed for this month’s readings.
At the same time, mortgage rates are still historically low and dipped back below 3% in late April and have remained there. For some perspective, the Freddie Mac mortgage market survey has weekly data going back to April 2, 1971. That’s 2,615 weekly readings. There are only 27 readings lower than the most recent (2.96%) and they all occurred in a 29-week span between 8/6/2020 and 2/18/2021.
It’ll be interesting to see if a bifurcation of sorts between lower and higher coupons materializes. As always, time will tell.
Existing Home Inventory Bounces (Barely) Off All-Time Low
Prepay Speeds Broadly Decline
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 and 3.0s lose steam but remain elevated overall
Deep Dive – 30-Year GNMA Jumbo 2.5s of 2020
This is a continuation from previous publications. The table below consist of substantially every 30-Year GNMA Jumbo 2.50 in the 2020 vintage. Last month we said this would be particularly interesting to watch the May release given the expected decline in prepayment activity. Overall, there were significant declines in prepayments in the more aged pools. The 8- and 9-month aged pools bear special attention in upcoming releases as they exhibited more typical behavior this month which bucked the overall trend.
Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening
Mortgage Rates – Rates move lower off recent highs
Will Steeper Curve Revive the ARM Market?
What We’re Reading
“Interest rates are at near-historic lows. There have been only eight months in the past 50 years when rates were lower than they are now—and those eight months were all during the pandemic.”
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Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies