Uncategorized

Slowing prepayment speeds into January

admin | December 7, 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 slowed in November but still came in above expectations, falling 14.7% at Fannie Mae and 13.0% at Freddie Mac. Speeds should slow another 10% in December and possibly another 5% to 10% in January. Although rates have rallied over the last month, the move was not large enough to lift speeds. Ginnie Mae pools and conventional pools backed by lower loan balances still look like good protection against extension risk.

Still running at a faster pace

Some pools continue to prepay faster than the broad market:

Ginnie Mae pools trading below par continue to prepay significantly faster than their conventional counterparts. For example, 2016 vintage Ginnie Mae 2.5%s prepaid 7.5 CPR in November compared to 4.5 CPR for Fannie Mae, and 2016 Ginnie Mae 3.0%s prepaid 9.7 CPR compared to 6.3 CPR for Fannie Mae.
Pools below par backed by smaller loans continue to prepay faster than generic pools. For example, 2016 vintage 3.0% low loan-balance pools prepaid 8.5 CPR in November, only 0.3 CPR slower than October. Generic pools slowed 0.7 CPR to 6.2 CPR.

The Fannie Mae and Freddie Mac numbers

Fannie Mae 30-year aggregate speeds slowed 14.7% to 7.6 CPR from 8.8 CPR, a slightly higher print than expected. Slower speeds were driven by a 2-day drop in business days, which accounted for a roughly 10% decline. Seasonally lower housing turnover and roughly 10 bp higher lagged mortgage rates also contributed to slower speeds. Speeds fell pretty consistently across the coupons, which is typical when speeds are primarily driven by day-count.

Freddie Mac 30-year speeds fell 13.0% to 7.4 CPR from 8.5 CPR, a bit stronger than Fannie Mae’s print. This slightly narrowed the aggregate speed gap between the two GSEs. The 2.5%s 2016 were a bit interesting—that Gold cohort jumped 24.2% to 6.0 CPR from 4.9 CPR while the same Fannie cohort slowed 28.9% to 4.4 CPR from 6.1 CPR. Granted this is a small cohort, roughly $4 billion at each GSE, but the Freddie print is quite strong for such a deep discount in a winter month.

New pool issuance holds steady

New pool issuance was virtually unchanged at roughly $97.0 billion in November. Purchase loan volume only dropped slightly, to $68.0 billion from $69.3 billion. Strong purchase loan production is an indicator that there is a good amount of housing turnover. Looking ahead, the slower winter months should bring a commensurate drop in purchase production but that wouldn’t necessarily indicate a permanent drop.

Meanwhile, refinance volumes increased slightly. Cash out refinances, which are reported by Freddie Mac, bounced back in November. The $5.5 billion printed was the highest number since May and the third highest month of 2018. Strong cash-out refinance production is another indicator that discount prepayment speeds should remain relatively strong.

Exhibit 1: Fewer business days and lower seasonal turnover slow speeds

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

Ginnie Mae speeds slowed along with conventionals

Ginnie Mae MBS also slowed in December—aggregate Ginnie Mae I speeds fell 12% and Ginnie Mae II speeds dropped 14%. Since prepayments were primarily determined by lower day-count and lower seasonal turnover, changes in Ginnie Mae speeds should track conventionals in November. On an absolute basis, however, Ginnie Mae pools generally remain faster than conventional pools. This is a particular benefit in discount Ginnie Mae 2.5% and 3.0% pools.

Looking ahead

Prepayment speeds should continue to slow over the next couple of months. The recent drop in interest rates is too modest and rates are too high to push speeds faster. Slower housing turnover and an extremely short month in December—only 19 business days due to the holidays—should push speeds another 10% slower. Day-count rebounds in January but speeds are typically extremely slow that month and could drop an additional 5–10%. This would push aggregate speeds to bottom at roughly 6 CPR before increasing into the spring and summer months.

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.