November Prepayment Speeds
December 7, 2017
Another month with no surprises in the release of agency MBS prepayments. November completely erased the increases observed last month, and then some. Both FNMA and FHLMC thirty-year MBS speeds decreased 10% in fractional terms, while fifteen-year collateral decreased 9% and 7%, respectively. GNMA slowed less than FNMA and FHLMC: thirty-year GNMA I and II MBS slowed 2% and 3%, respectively, while fifteen-years slowed 8% and 2%, respectively.
Thirty- and fifteen-year mortgage rates increased slightly for the preceding couple of months, which helped to suppress refinancing activity. Both terms reached their year-to-date lows the beginning of September, 3.67% and 2.91%, respectively, and subsequently rebounded to end the relevant refi window period 15-20bp higher. Fifteen-year mortgage rates have continued to climb even higher, surpassing their year-to-date average by 10bp or so. Consequently, the MBA Refi Index hit its year-to-date high of 1636.80 the week of September 8th. It has since fallen to well below the average and currently stands at 1313.90 the week of December 1st.
Next month’s prepayments are expected to decrease. December has one less business day than November, and mortgage rates continue to increase, especially fifteen-year rates. Notably, December will be the first month since June that MBS prepayments are not expected to reverse the month prior’s increases/decrease. Prepayments in 2017, with the exception of February, have been very much range bound, showing no movement in either direction. 2018 looks to hold more of the same, unless unexpectedly large interest rate movements or politics propel speeds to move (in either direction). In the immortal words of Donald Trump, “Well, real estate is always good, as far as I’m concerned”, so it’s anyone’s guess how good he might try to make it via changes at the GSEs. Refinancing costs and, to a lesser extent, qualification limitations continue to apply significant friction to prepayment speeds.
Director of Investment Product Strategies