Prepay Commentary

September 2020 MBS Prepayment Speeds

September factors were released Friday evening before the holiday (reflecting activity in August), and prepayment speeds are now available. Prepay speeds remained elevated. Conventional coupons of approximately 3.0 and lower saw speeds increase by more than a token amount and, while higher coupons technically declined, they really remained largely the same. GNMA speeds followed the same trend except higher coupons (4.0+ coupons) saw more meaningful declines. This is likely due to lower buyout activity, but we will have to wait for the data to be released to know for sure.

Looking forward, again I think it is likely prepay speeds remain elevated. Housing continues to be resilient and those who can refinance will likely continue to do so (see WSJ article below). Mortgage rates have continued to fall and currently sit at/near all-time lows as measured by the Freddie Mac Primary Mortgage Market Survey (see section below).

Moving forward, it will be interesting to see if/when typical seasonal effects kick in. Around this time of year, the “turnover” component (people moving) tends to decline as children are usually in school and moving is less desirable. However, with many doing distance learning, perhaps some seasonal effects will be muted this year. As always, we’ll know more next month.

Fannie/Freddie Refinancing Fee Announced in August

From 8/31 Sector Update

Last week, the FHFA directed Fannie and Freddie to delay the implementation of the previously-announced “Adverse Market Refinance Fee” until December 1, 2020. They also announced loans with balances below $125,000 or made through other “affordable refinance products” would be exempt from the fee.

From 8/24 Sector Update

Over the weekend, a WSJ article on Saturday said, “As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions.”

Background from 8/17 Sector Update

On August 12th, both Fannie Mae and Freddie Mac announced a new 50bps ‘adverse market fee’ that will apply to substantially all refinancing transactions. The 50bps fee will be implemented, according to the Enterprises, due to increased risk and anticipated higher costs related to COVID-19 and will be effective on September 1st, 2020. This doesn’t appear to be a big impediment to elevated levels of refinance activity, many estimate the impact equivalent to an 1/8 increase in mortgage rates. The fee was met with strong pushback from the mortgage industry as well as the White House.

Prepay Protection Still Working

Higher Coupon Speeds Remain Elevated, Lower Coupon Continue to Increase

Primary/Secondary Spread – Remains Elevated as Mortgage Rates Stay Low

Mortgage Rates – Near/At All Time Lows on 15- and 30-Year Mortgage Rates

What We’re Reading

WSJ: Mortgage Refinancings Boom, Even as Coronavirus Hits Economy

“The mortgage market’s response to the pandemic is the latest in a series of seemingly opposing indicators of Americans’ financial health.”

UMBS Speeds by Vintage Year

FGLMC Speeds by Vintage Year

GNMA Speeds by Vintage Year

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks

Adam Hofer

Analyst, Investment Product Strategies

Vining Sparks

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