Uncategorized
Prepayment speeds take off in July
admin | August 9, 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. This material does not constitute research.
Fannie Mae and Freddie Mac 30-year prepayment speeds jumped in July, rising slightly faster than expectations of a 25% to 30% month-over-month increase. Fannie 30-year speeds rose 31% and Freddie speeds 33% overall. Fannie Mae and Freddie Mac 30-year 4.0%s skyrocketed 50% and 54% respectively. This was driven by fast prints in the 2018 and 2019 vintages, which jumped more than 80% and in many cases prepaid faster than the same vintage 4.5%s.
Exhibit 1: July speeds surged in response to the May rate rally
Note: % change in 30-year prepayment speeds from June 2019 to July 2019. Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
The market anticipated faster speeds after rates dropped in May, the bulk of which occurred late in the month with a limited effect on June speeds. Two additional business days in July contributed to faster speeds, and seasonal turnover remains strong. The agencies reported July speeds on August 7.
The prepayment danger zone
Loans in the 6- to 12-WALA range are the most refinanceable since much of the loan documentation is still fresh and the old appraisal often valid. This is why the 2018 vintage likely prepaid so quickly. Many lenders attempt to limit prepayments within the first six months, and after 12 months documentation becomes stale. There is a pay-up for low WALA pools because speeds are so slow for the first few months, but an investor could lose out if rates drop while the pool is in the 6- to 12-WALA danger zone.
Ginnie Mae speeds also jumped higher. Ginnie IIs in particular increased 25% overall with strong increases across 3.0%s through 5.5%s. This was a little slower than in conventionals, but Ginnies were already prepaying much faster. The absolute prepayment pickup was actually greater than conventionals. Higher coupons slowed, most likely due to a drop in buyouts.
More than half the market is refinanceable
Interest rates have fallen sharply over the last few days. The 10-year Treasury rate fell to 1.63% as of Wednesday morning from 2.06% six days earlier. This move has pushed the share of outstanding conventional 30-year mortgages in-the-money to 54%. The percent in-the-money is determined using the spread between a loan’s note rate and the current Freddie Mac Primary Mortgage Market Survey rate. A loan is considered in-the-money if the spread is at least 75 bp.
Projected aggregate MBS prepayment speeds should rise from here (Exhibit 2) The current rally should primarily affect September speeds (October report), when aggregate speeds should reach 19 to 20 CPR, which is 20% to 25% faster than July. Turnover begins to slow in September and day count is low—2 fewer business days than in July and August—which somewhat tempers the pick-up due to lower rates.
Exhibit 2: 54% of MBS are in-the-money at current rates
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
For prepayment speeds to reach the level seen in late 2012 and early 2013, the 10-year Treasury rate would need to drop to roughly 1.0%. The mortgage market should be roughly 80% in-the-money, the Freddie survey rate should be about 2.70%, and the MBS current coupon would be 2.0%s. Prepayment speeds would reach roughly 30 CPR at those rates.
The last time the market was this refinanceable was in mid-2016
Exhibit 3 plots aggregate prepayment speeds each month since January 2009. The percent of the market that is in-the-money is printed inside each bubble. The last time the market was over 50% in-the-money was in mid-2016 (post-Brexit) and speeds reached a little over 20 CPR.
Exhibit 3: Historical CPR and % in-the-money over time
Note: % > 75 bp ITM printed at each data point; 53.9% ITM as of 8/7/2019. Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
July speeds look pretty strong compared to prior times that the market was 28% in-the-money, but a few factors explain this:
- July is in the middle of the summer and housing turnover is at its peak.
- Newer loans can respond to lower rates more quickly, so a 45-day lag likely understates how many of those loans are in the money (rates fell rapidly in late May so there is a relatively large difference between a 30 and 45 day lag).
- There is less burnout in the market.
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 © 2025 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.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
