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.
- The fastest 15-Year UMBS cohort for the month was 2018 production 15-Year 3.5s at a 29.9 CPR.
- The fastest 20-Year UMBS cohort for the month was 2018 production 20-Year 4.0s at a 32.1 CPR.
- The fastest 30-Year UMBS cohort for the month was 2018 production 30-Year 4.0s at a 43.3 CPR.
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.
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
“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.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies