October MBS Prepayment Speeds
October factors are out and, overall, prepayments increased again, but there are some nuances this month. Again, like last month, lower coupons saw declines from the previous month, a sign of lower seasonal factors. At risk of sounding like a broken record this year, it is likely to see prepayment speeds increase again next month. Even though mortgage rates have recently bounced up by ~15 bps, there are still plenty of in-the-money mortgages to refinance. However, once again there will be competing interest as declining seasonal factors should offset some of the increases in rate/term refinancings.
Also, of interest since our last publication, the Housing Reform Plan put forth by Treasury has certainly put the wheels in motion for GSE reform. I have included a link below to a Strategic Insight authored on the topic along with a recent Bloomberg article about an administrative step taken since release of the plan detailing how (and how much) Fannie and Freddie can grow their capital cushions.
Notables and Thoughts
- The fastest 15-Year UMBS cohort for the month was 2018 production 15-Year 3.5s at a 27.2 CPR.
- The fastest 20-Year UMBS cohort for the month was 2018 production 20-Year 4.0s at a 30.3 CPR.
- The fastest 30-Year UMBS cohort for the month was 2018 production 30-Year 4.0s at a 41.6 CPR.
- Amid budgeting season, and given this continued and sustained decline in rates, it is worth looking at your projected yields, that is, the expected yield moving forward given current prepayment expectations as they have likely changed since your initial purchase.
- We can help you with this in a variety of ways, but one you may already be familiar with is to simply request a Performance Profile.
Based on the Freddie Mac Primary Mortgage Market Survey, 30- and 15- year fixed-rate mortgage rates are right above their lows of the year by 14-16 bps. Still, this year alone, 30- and 15-year mortgage rates are down 90 and 87 bps, respectively. If current Treasury yields more or less hold (10-year currently at 1.54%), I would expect mortgage rates to decline moving forward.
Vining Sparks: Strategic Insight: Housing Finance Reform Plan
“The only thing certain about this plan is that it will change. Right now, given the low probability of legislative action, we think investors’ time is best spent focused on potential administrative changes.”
“Fannie will be permitted to retain earnings until its capital buffer hits $25 billion, while Freddie will be allowed to hold $20 billion, the Treasury Department and the Federal Housing Finance Agency announced Monday. Last year, Fannie reported net income of $16 billion and Freddie made $9.2 billion, signaling it could take more than a year for the companies to reach the administration’s new goal.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies