September MBS Prepayment Speeds
Sizable slowdowns for FNMA, FHLMC, and GNMA fixed rate and adjustable rate MBS prepayment speeds last month certainly included the combined effects of rising mortgage rates and burnout across the portion of the mortgage population still above market rates. Other causes also contributed though, with all the significant steering factors for prepayment speeds favoring a slowdown for last month. Seasonality and the prepayment speed slowdown that typically occurs subsequent to the elevated speeds of early spring and late summer pushed speeds lower and the related seasonally influenced slowdown in an already sluggish housing market reduced the turnover component of prepayment speeds. A less friendly calendar provided less business days to refinance or purchase homes, as September was an especially short business month given where the weekends fell and the Labor Day holiday. The weather had an influence as well, with flooding in the East coast curtailing a difficult to assess amount of mortgage activity.
Mortgage rates edged higher last months for all mortgage terms. While thirty year fixed rate conventional rates only increased by a little less than a quarter percent, a quick glance at the history graph shows this resulted in elevation above the high end of the narrow range thirty year mortgage rates remained confined to for most of the May through August period. The timing of a small upward movement in mid-July and the fact that rates remained in the same range for so long suppressed prepayments on the above-market coupon mortgages more than the September increases in yields and mortgage rates though; the September increase should influence the next two months speeds based on mortgage application processing periods and MBS payment delays.
Last month’s prepayment slowdown across lower coupons demonstrates the effects of the calendar and seasonal factors on prepayments and also suggests ongoing weakness in the housing market as housing turnover greatly influences speeds for the below current market mortgage coupons. It will be interesting to see the extent to which the next round of home sales data verifies the weakness suggested by recently slow mortgage applications and prepayments.
The business calendar provides three extra days of potential mortgage closings for next month’s prepayment speeds. While this day count and other technical factors should offset much of the monthly impact of higher mortgage rates, the long term gradual trend toward slower prepayment speeds should remain intact for the coming months barring a meaningful turnaround in mortgage rate trends.
Director of Investment Product Strategies