Prepay Commentary

May Prepayment Speeds

June 7, 2017

With the exception of a few out-of-the-money coupons, all FNMA, FHLMC, and GNMA fixed-rate MBS prepayment speeds increased. FNMA MBS had the largest increases, 18%, while GNMA MBS prepayments increased by the smallest amount, 16%. This month’s prepayments reverse the decline in prepayments exhibited last month, further building upon the last prepay increases observed in March. While these increases appear to be great in percentage terms, nominally prepayments are still relatively low in reference to the last several years. Many traders and investors anticipated these prepayment increases, as day count alone for the month of May should have caused a prepay jump of 15.7% compared to April; May had three more collection days than April.

Thirty-year mortgage rates were essentially unchanged from April, averaging 3.89% for the month of May compared to 3.90% for April, according to Bankrate.com. Fifteen-year mortgage rates have performed similarly, averaging 3.09% for both April and May, according to Bankrate.com. Year-to-date both mortgage terms have remained in a tight range: moving less than 0.5% for thirty-year mortgages and less than 0.35% for fifteen-year mortgages. The MBA Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year, but especially so for the last two months. May’s index level ended almost right on top of its year-to-date average of 1299. Burnout is also reflected in prepayments; the only coupon cohorts that exhibited increases were a handful of coupons higher than 6% for fifteen years and higher than 7% for thirty years for agency MBS.

As June has the same number of collection days as May, MBS prepayments next month should either hold steady or increase slightly due to a combination of technical and seasonal factors. Housing starts, mortgage applications, existing and new home sales, and other housing-related data all indicate a stagnant or weakening housing market, a sign that mortgage refinancing and prepayment-related activity will continue to be static. However, should U.S. Treasury yields continue to decline, to levels not seen since the U.S. Election, some borrowers may be induced to enter the mortgage refinance market again, giving rise to a nominal increase in prepayment rates in the future.