September Prepayment Speeds
October 6, 2017
MBS prepayments speeds slowed as expected, a complete reversal of the prior month’s increases. Again, technical factors were the main driver behind prepayment differentials MoM, as the housing market and mortgage rates have been locked in a near stagnant range for several months. For thirty-year MBS, both FNMA and FHLMC decreased 10% overall, GNMA Is decreased 11%, and GNMA IIs decreased 8%. Both in-the-money and out-of-the-money coupons slowed by similar amounts, confirming the technical and calendar related nature of the influences driving change.
Fifteen-year and thirty-year mortgage rates continued to fall from their March highs from August through early September, with the recent bounce pushing mortgage rates back to July levels. Conventional fifteen-year and thirty-year mortgages hit their year-to-date lows of 2.91% and 3.67%, respectively, in early September, according to Bankrate.com. Even though mortgage rates have steadily declined since March, prepayment speeds do not seem to reflect this downward trend, and consequently are more a reflection of seasonal factors, including day count. September had three less closing days than August, which accounts for a prepayment decrease of around 13% for the month of September. Meanwhile, the MBA Refi Index continues to be range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1636.80; however, it quickly dropped back closer to its six-month average of around 1400.
October has one more business day than September, and mortgage rates stayed in fairly close proximity to prior months during the pertinent application period. Prepayments are therefore expected to increase slightly, falling somewhere between this month’s and last month’s speeds.
Hurricanes Harvey and Irma should influence prepayment trends in a significant way for the affected regions for the next several months, while exerting very minor impacts on overall speeds. The storms certainly deterred voluntary prepayments. Additionally, there is a forbearance period for all counties declared disaster areas. This generally means a moratorium on evictions and foreclosures. The first 90 days is automatic, with the servicers’ discretion determining whether this period needs to be extended for another nine months after that. Meanwhile, both FNMA and FHLMC have said they intend to waive the four-month automatic purchase out of pools for all loans under forbearance. Assuming that happens, the effect on FNMA and FHLMC loan populations in the affected areas should print slower CPRs for the near term, a little over a year, due to reduced voluntary prepayments and minimal foreclosure related buyouts. Subsequently, as insurance claims and FEMA and other settlements pay out, and also as some irreversible and unfortunate situations conclude, CPRs for the affected areas should pick up sharply. While loans in GNMA pools are similarly covered by the forbearance policies announced by the FHFA, servicer buyouts are likely to accelerate, increasing speeds for the population of affected loans in GNMA pools during the coming months.
Director of Investment Product Strategies