November MBS Prepayment Speeds
For coupons of any significant balance, MBS prepayments decreased slightly in November. We wrote last month that we thought October was more-or-less an outlier due to the extra couple of business days in the month. It appears that was the case as speeds decreased slightly and fell back into line with September. At this point, to see any meaningful move in prepayment rates would seem to take a fairly meaningful decline in mortgage rates and/or changes in economic conditions. As it stands, the S&P 500 is down over 4% for the month and this morning’s job report was fairly weak compared to the rest of 2018.
“More than 80% of borrowers who refinanced in the third quarter chose the ‘cash out’ option, withdrawing $14.6 billion in equity out of their homes, according to government-sponsored mortgage corporation Freddie Mac. That is the highest share of cash-out refis since 2007.”
“Bankers and other industry watchers expect the ranks of smaller nonbank mortgage lenders to keep shrinking in coming months, as rising rates dry up the once-lucrative mortgage-refinancing business and make home purchases costlier.”
For the year, based on the Freddie Mac Primary Mortgage Market Survey, 30yr Fixed Rate Mortgage rates are up 86bps from 3.95 to 4.81. 15yr Fixed Rate Mortgage rates are up 83bps from 3.38 to 4.21. For perspective, on a mortgage balance of $250,000 this increase represents additional monthly payments of $127 and $103 respectively.
Kevin Smith, CFA
SVP, Director Investment Product Strategies