Uncategorized

Prepayment speeds rebound due to higher day count

| 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

Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities

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.

Looking ahead

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.

Data Tables

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

 

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles