Prepay Commentary

May MBS Prepayment Speeds

Last month we opined that continued lower mortgage rates along with seasonal factors “could point towards faster speeds next month”. This appears to be the case and with speeds released overnight, mortgages saw a broad-based increase in prepayment speeds this month. Regarding speeds next month, right now I think it is reasonable to expect prepays to at least maintain current levels and likely increase. Mortgage rates have only ticked slightly higher since their recent lows and seasonal factors are likely to persist.

Single Security Initiative

In ongoing and upcoming news, June 3^rd marks the “Go Live” date for the Single Security Initiative. This is a joint venture between Fannie Mae and Freddie Mac to issue a single, Uniform, TBA-eligible Mortgage Backed Security. Today specifically marks the opening of Freddie Mac’s offer to exchange certain eligible securities for Mirror (UMBS) certificates. If you need a refresher, here is a link to a Strategic Insight authored in March. This will be an ongoing section for the foreseeable future in the Prepay Commentary newsletter.

Notables and Thoughts

A good example of likely seasonal prepayment behavior (not rate-driven) are speed increases seen in discount coupons. For example, FNMA 30yr 3s and 15yr 2.5s both saw 18% (from 7.2 to 8.5) and 13% (8.7 to 9.8) increases, respectively.
On an absolute basis, the largest increases were in FN/FH/GN 30yr 4.0s and FN/FH 15yr 4.0s.
GNMA 30yr 4.5s posted a 27% increase (14.0 to 17.7 CPR) with the 2018 vintage posting a 46% increase (13.2 to 19.2 CPR).
Since many of our investors favor front-cashflow CMOs and, in effect, a front cashflow tranche magnifies prepay speeds seen on the underlying mortgages, it may be worth considering a “cut-down” coupon (e.g. 4 .0 coupon off of 4.5 collateral) to lower the price and risk to underperforming yields.
If you would like to see projected yields on your portfolio of mortgage holdings, please reach out to your Account Representative, or myself, and we can run a Performance Profile.

Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15-year fixed-rate mortgage rates are up off recent lows (but not by much), they are still down 80 and 76bps, respectively, from 2018 highs.

(WSJ) Ginnie Mae Moves to Crack Down on Repeated Refinancings

“Ginnie Mae is taking steps to curb repeated mortgage refinancings that it says are hurting both borrowers and investors . . . Its proposal, released on Friday, is aimed at stopping so-called ‘churning,’ a practice in which lenders push borrowers to refinance their home loans over and over in a bid to boost fees to the lenders.”

(Bloomberg) How About Leaving Fannie Mae and Freddie Mac Alone?

“Actually, given the options under consideration, the best approach might be to do nothing at all.”