Prepay Commentary |  |
October 2021 MBS Prepayment Speeds
October factors were released last evening (reflecting activity in September), and prepayment speeds are now available. In a very broad sense, prepay speeds declined month-over-month, which was interesting since mortgage rates declined for the approximate refinance window. When you dig in though, it starts to make more sense. Lower coupons and newer vintages largely maintained or increased from last month. On the other hand, higher coupons tended to decline. Perhaps this is indicative of more apparent burnout. Looking ahead to next month, mortgage rates during the refi window were slightly higher than this period but perhaps there will be some follow through. Other factors to consider is one fewer business day in September and typical seasonal declines in activity. As always, we will know more next month.
Treasury yields in 5-10 year maturities have increased by 20-25 bps since our last publication. Customer activity has somewhat been affected by this move. In straight collateral, we do see some investors becoming more comfortable with generic 2.0 and 2.5 coupons, whereas previously they may have looked at prepayment protection collateral on those coupons. Something worth considering, the last time we had a similar run up in rates, we also had investors looking at bonds with favorable collateral attributes (low loan balance, etc.) where payups had declined significantly. A free “option” should never exist, but they certainly can get cheaper.
Moving Forward – Mortgage rates remain low
Mortgage rates are still historically low since dipping back below 3% in late April and have largely remained there, never getting more than a couple bps above 3%. The lowest ever recorded rate was 2.65% in January of this year and Freddie Mac’s most recent reading has it at 2.99%. Regarding 15-year mortgage rates, the most recent reading is 2.23%, just 13 bps above the all-time low of 2.10% from early August.
Supply slightly improved, still near lowest levels in recent history
Prepay speeds broadly decline, newer vintages and lower coupons maintain/increase
W2D means “worst-to-deliver” – these speeds do not include collateral such as loan balance, New York, 100% Investor, etc.
Prepay Friction – 30-Year 2.5s of 2020
Prepay Friction – 15-Year 2.5s of 2020
Prepay Friction – 15-Year 2.0s of 2020
Jumbo Comparison – 2.0s Remain Subdued, 2.5s and 3.0s remain elevated
Deep Dive – 30-Year GNMA Jumbo 2.5s of 2020
At some point, we will need to find a new deep dive subject, but this population of bonds continues to be interesting to observe. The table below consist of substantially every 30-Year GNMA Jumbo 2.50 in the 2020 vintage. As we’ve previously seen, it’s possible to have sustained periods of very high prepayments. Higher mortgage rates can also stop precipitous increases in their tracks. Prepayments largely decreased in this group of bonds except for the youngest vintages where the ramp up in speeds is still visible. In the most seasoned of pools, absolute levels of prepayments were still elevated even though they tended to decline month-over-month.
Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening
Mortgage Rates – Trending higher, not as high as you might expect though
What We’re Reading
Vining Sparks: MBS & Prepayment Update
This presentation looks back over 2021 and how different prepay models have performed so far this year. It is always important, but especially in this environment, that robust prepayment assumptions are used. We also make note that Yield Book is scheduled to release a model update and provide some background and comparisons.
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Vining Sparks
Adam Hofer
Analyst, Investment Product Strategies
Vining Sparks