Prepayment speeds rebound due to higher day count
admin | November 9, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Prepayment speeds in 30-year MBS rebounded in October, increasing 8.5% at Fannie Mae and 4.8% at Freddie Mac. The Fannie Mae print was stronger than expected while the Freddie Mac number matched expectations, reopening a small prepayment gap between the two enterprises. Speeds should slow substantially over the next few months—rates are significantly higher and housing turnover slower during the winter—and could drop as low as 5.0–6.0 CPR in January 2019. However, there are pockets of discount MBS that offer protection from slower speeds:
- Discount Ginnie Mae pools continue to prepay much faster than comparable conventionals. For example, 2016 vintage Ginnie 3.0%s prepaid 11.0 CPR in October compared to 7.1 CPR for conventional pools.
- Discount MHA pools—rising home prices have unlocked borrowers’ ability to buy a new home. For example, 2012 vintage MHA 3.0%s with an original LTV between 95 and 100 prepaid 8.6 CPR in October vs. 7.8 CPR for generic pools.
- Discount loan balance pools exhibit faster turnover. For example, 2016 vintage 3.0%s prepaid 8.8 CPR in October vs. 6.9 CPR for generic pools, and 2016 vintage 15 year 2.5%s prepaid 9.3 CPR vs. 7.3 CPR for generic pools.
The Fannie Mae and Freddie Mac numbers
Fannie Mae 30-year aggregate speeds increased 8.6% to 8.8 CPR from 8.1 CPR, somewhat higher than expectations. A large jump in day count pushed speeds faster across the board—an additional 3.5 days suggested speeds should increase roughly 18%–but 10 bp higher lagged interest rates and seasonal slowdowns in housing turnover offset some of the increase. Premium coupons are less sensitive to changes in rates and turnover, therefore their speeds increased a bit more than cuspy and discount coupons.
Freddie Mac 30-year speeds increased 4.8% to 8.5 CPR from 8.1 CPR, less than Fannie Mae and matching expectations. Fannie prints were faster than Freddie for all coupons less than 5.0%.
Purchase origination slows again
Issuance of conventional purchase loans fell for the second consecutive month, dropping 8% below September’s level. This is consistent with typical seasonal slowdowns in housing turnover. However, issuance is a lagging indicator of housing turnover activity, therefore the weakness shown in the September existing home sales reading might not manifest in lower issuance until next month. It is also possible that the existing home sales number was somewhat less accurate since the seasonal adjustment (22.6%) was very large. The adjustment was only 16.2% in September 2017 and 12.6% in September 2016.
Conventional refinance volumes held steady in aggregate—a 4.2% drop at Fannie Mae offset a 6.6% increase at Freddie Mac. Cash out refinances were 64.2% of Freddie Mac refinances, up from 63.3% in September.
Exhibit 1: Higher day count lifts prepayment speeds
Ginnie Mae speeds increased, meeting expectations
Ginnie Mae MBS also prepaid faster—aggregate Ginnie I speeds increased 2.9% and Ginnie II speeds increased 4.3%. These numbers were consistent with the expected increased for the month. Pickups were strongest in discount 3.0% and 3.5% cohorts and were relatively light in higher coupons. In fact the 4.0% coupon was virtually unchanged month-over-month.
Gross WACs fall slightly
The spread between gross WACs and pool coupon has been growing since early summer, as originators delivered loans into lower coupons and retained more servicing. For example, the spread between gross WAC and coupon for 4.0% pools increased from 44 bp in March to 74 bp in September. This was true across the stack. This spread declined in October for the first time since March, falling 4 bp in 4.0%s and 4.5%s. However, 5.0% pools widened another 3 bp to 70 bp.
Prepayment speeds should slow throughout the fall and winter months due to significantly higher interest rates and seasonally lower housing turnover. Primary mortgage rates reached 4.83% on the most recent Freddie Mac survey, and the recent sell-off should push the next reading roughly 10 bp higher. Less than 5% of the MBS universe is refinanceable at those rate levels. Along with two fewer business days and seasonally slower housing turnover prepayments could slow 20% in November. At current interest rates speeds will continue to slow in December and January, possibly dropping below 6.0 CPR in aggregate.
Exhibit 2: Prepayment summary
Our short term forecast is shown in Exhibit 5 (Fannie Mae) and Exhibit 6 (Freddie Mac). Exhibit 4 shows the static rates used in the prepayment forecast.
Exhibit 3: Agency speeds, largest cohorts
Exhibit 4: Mortgage rate forecast
Exhibit 5: Fannie Mae short term forecast
Exhibit 6: Freddie Mac short term forecast