Prepay Commentary

September 2021 MBS Prepayment Speeds

September factors were released last evening (reflecting activity in August), and prepayment speeds are now available. Conventional speeds came in higher just about any way you slice the data. This isn’t necessarily surprising as we wrote last month that lower mortgage rates, especially in the later half of the refi-window, could support this. Looking ahead to next month, mortgage rates during the refi-window dipped back down to levels not seen since earlier this year in April and May and likely supports higher prepayments than we witnessed this month.

It makes sense then that we continue to see activity focused in low-coupon MBS and stripped-down coupon CMOs. It is still uncertain if burnout is starting to occur in higher coupons. This month there were a good number of higher-coupon cohorts that posted speeds more/less the same as the prior month; however, speeds remain elevated. As always, we will know more next month.

Moving Forward – Mortgage rates remain low
Mortgage rates are still historically low and dipped 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 2.87%. Regarding 15-year mortgage rates, the most recent reading is 2.18%, just 8 bps above the all time low of 2.10% from just a month ago.

Strong demand, low inventory keeps prices high

Prepay speeds broadly 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
This is a continuation from previous publications. 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 increased in this population except for the most seasoned of pools. In the most seasoned of pools, absolute levels of prepayments were still elevated even though they declined month-over-month.

Primary/Secondary Spread – Leveled Off After 2020 Blowout and Subsequent Tightening

Mortgage Rates – 30-year solidly under 3%, 15-year sets new all-time low

5/1 ARM rate advantage remains in recent ranges even as curve has flattened

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.

UMBS 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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