Prepayments post a 10-year challenge pic
admin | February 8, 2019
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 continued their seasonal decline in January, pulled lower by extremely slow housing turnover. Another 2.5 business days in January could not overcome seasonal drag. Lagged interest rates, which get prepayments rolling months before they show up, did fall from December by 25 bp to 30 bp but were still stayed high enough to keep most of the market out-of-the-money for refinancing. Fannie Mae speeds dropped to 6.6 CPR, the slowest print since 2008. Speeds look set to rebound, but only slightly.
A bounce in February and March
Speeds look set to rebound roughly 15% in February and another 20% to 25% in March. Lagged mortgage rates are 15 bp lower and seasonal turnover begins to increase. These factors should push speeds faster in February despite the fact that there are two fewer business days.
Similar to December, discount Ginnie Mae pools did not slow as much as conventional pools and remained generally 2 CPR to 3 CPR faster than conventionals. For example:
- Fannie 30 year 3.5%s 2018 increased 2.2% to 3.8 CPR, while the equivalent Ginnie II cohort increased 1.1% to 6.6 CPR.
- Fannie 30 year 3.0%s 2018 slowed 35.5% to 2.5 CPR, while the equivalent Ginnie II cohort increased 9.8% to 6.1 CPR.
Ginnie Mae 100% Puerto Rico pools also slowed in January. These pools historically offer excellent prepayment protection, but there have been concerns about the potential for fast speeds caused by Hurricane Maria in 2017. Most of the delinquencies resulting from the hurricane have been resolved–and many cured without a buyout—although delinquencies are still slightly elevated relative to the pre-hurricane norm. Slower speeds suggest that buyouts did not increase in January, and might even have fallen; buyout data isn’t available until the evening of the sixth business day.
The Fannie Mae and Freddie Mac numbers
Fannie Mae 30-year aggregate speeds slowed 7.9% to 6.6 CPR from 7.1 CPR, somewhat more than the expected 5% slowdown. Freddie Mac 30-year speeds fell 6.3% to 6.5 CPR from 6.9 CPR, a bit closer to expectations than Fannie’s print. Gold speeds were a little stronger in 3.0%s and 3.5%s
Slower speeds were driven by low seasonal housing turnover, which is usually very low in January. Speeds fell despite 2.5 additional business days and 25 bp to 30 bp lower lagged mortgage rates. Low coupon pools, which primarily prepay due to housing turnover since the loans are out-of-the-money to refi, slowed the most. For example, Fannie Mae 3.0%s slowed 15.4% in aggregate, and most vintages of that coupon slowed comparably.
Exhibit 1: Slower seasonal housing turnover drags speeds down
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities
Refinanceability rises but only a little
Lagged mortgage rates fell 25 bp to 30 bp in January and will be another 15 bp lower in February. A cumulative rate move of that magnitude typically would have a large effect on prepayment speeds. But primary rates are so much higher than most mortgages that the majority of the MBS universe remains out-of-the-money (Exhibit 2).
Exhibit 2: Most mortgages are not in-the-money
Note: data show the share of outstanding 30-year MBS with 75 bp or more refinancing incentive and also shows the average prepayment speed expected at those rates. The average speed ignores seasonality; actual speeds should be faster in the summer and slower in the winter. Source: Amherst Pierpont Securities.
The MBS universe dropped below 7% in-the-money when Treasury rates exceeded 3.0% and mortgage rates exceeded 4.8%; the subsequent rally pushed refinanceability up to 10%. Even a 2.0% 10-year Treasury rate would only result in 31% of mortgages in-the-money and an aggregate speed of only 13 CPR. However, that only adds roughly 1.0 CPR to average speeds. Certain coupons will react more to the rally than others, of course, but most of the mortgage market will not refinance at these rates.
Prepayment speeds should rebound by roughly 15% in February and another 20% to 25% in March. Lagged mortgage rates fall another 15 bp and seasonal turnover begins to increase in February, pushing speeds faster despite the fact that there are 2 fewer business days.
Exhibit 3: Prepayment summary
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Our short term forecast is shown in Exhibit 6 (Fannie Mae) and Exhibit 7 (Freddie Mac). Exhibit 5 shows the static rates used in the prepayment forecast.
Exhibit 4: Agency speeds, largest cohorts
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities
Exhibit 5: Mortgage rate forecast
Source: Freddie Mac, Bloomberg, Amherst Pierpont Securities
Exhibit 6: Fannie Mae short term forecast
Source: Fannie Mae, eMBS, Amherst Pierpont Securities
Exhibit 7: Freddie Mac short term forecast
Source: Freddie Mac, eMBS, Amherst Pierpont Securities
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.
Copyright © 2023 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.