Prepay Commentary

November MBS Prepayment Speeds



November factors are out and, no surprise, prepayments increased again. This was largely expected given lower mortgage rates during the appropriate refi period along with two extra business days in October. Increases were broad-based save for a couple low-coupon (2.5 and 3.0) cohorts. For the first time in at least two months, I think we can expect slower prepayments next month for a couple reasons. First, higher mortgage rates should discourage refinancing activity, and second, the turnover component (non-rate related prepayments) should decline into year-end.


Notables


Food for Thought

It is well accepted by MBS investors that New York homeowners, due to a state tax, typically refinance at a lower rate than the overall population. This is acknowledged by markets in the form of a “pay-up” (higher price) for pools containing 100% New York collateral. Given the massive increases in prepayments this year, I thought it would be interesting to see how 100% New York pools behaved. Looking back 5-years provides us with two periods of increased refinancing activity, 2016 and current, along with a period of relative calm in 2018. As you can notice below, “NY Only” collateral consistently pays slower, but the gap increases markedly during periods of increased refinancing activity as measured by the MBA US Refinancing Index.



Mortgage Rates

Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15-year fixed-rate mortgage rates are 20 and 13 bps above their respective lows, respectively. Still, this year alone, 30- and 15-year mortgage rates are down 90 and 87 bps, respectively. In our last publication, the 10-year Treasury stood at 1.54%. Currently, the 10-year Treasury yields 1.94% on increased optimism surrounding a trade-deal with China. If rates hold on, we should see mortgage rates creep up further.




What We’re Reading

WSJ: People Are Staying in Their Homes Longer – a Big Reason for Slower Sales

“Homeowners nationwide are remaining in their homes typically 13 years, five years longer than they did in 2010, according to a new analysis by real-estate brokerage Redfin. When owners don’t trade up to a larger home for a growing family or downsize when children leave, it plugs up the market for buyers coming behind them.”












UMBS Speeds by Vintage Year

FGLMC Speeds by Vintage Year

GNMA Speeds by Vintage Year



Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

KSmith@viningsparks.com


Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

AHofer@viningsparks.com


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