Prepayments turn lower, New York stays slow
admin | December 6, 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.
A large drop in day count, slower seasonal turnover and slightly higher trailing interest rates drove conventional MBS prepayment speeds down an expected 21% in November. Unless interest rates drop sharply, October’s levels should mark the peak of prepayments for the foreseeable future.
Even slower speeds ahead
Prepayment speeds should continue to slow over the next few months. Interest rates have increased further and turnover should continue its seasonal slowdown. December’s print should be relative similar to November’s, since there is a slight pick-up in day count that offsets further seasonal slowdowns and slightly higher lagged interest rates. Speeds should bottom out in January and February, likely roughly 10% below November’s levels.
Fast servicers prepaid slower in New York in November
New York loans typically prepay much slower than loans from other states due to significantly higher closing costs. Borrowers generally pay higher legal fees and must pay a mortgage recording tax, which can exceed 2% of the loan balance in some locations. The disincentive is strong enough that even pools issued by very fast servicers prepay slower than a typical TBA pool from outside of New York.
The speed advantage in New York pools—even from fast servicers—persisted in November (Exhibit 1). The average loan from outside of New York prepaid faster than even Freedom/Quicken New York loans everywhere except the 50 bp refinance incentive bucket, where New York’s Freedom/Quicken loans matched the others. Even when the loans are 100 bp in-the-money, the fast servicers prepaid roughly 20% slower than generic loans. Pay-ups tend to be much lower for the faster servicers, which can make these loans an inexpensive source of prepayment protection.
Exhibit 1: Fast servicers in NY prepaid slower than TBA in November
Note: The exhibit shows the November S-Curves for loans in TBA-deliverable pools of at least $200,000 in loan size. All of the loans have WALAs between 6 and 24 months, which is typically when the S-Curve is the steepest (6 to 12 wala might be even steeper but there aren’t enough loans to do this cut). The first column includes all loans from outside New York. Source: Yield Book, Amherst Pierpont Securities
The Fannie Mae and Freddie Mac numbers
Both Fannie Mae and Freddie Mac 30-year MBS slowed 21% in November and dropped similarly across the coupon stack. The sharpest declines came in more recent production 3.0%s, 3.5%s, and 4.0%s. These increased the most during the refi wave so it is natural they would slow the most. For example, 2018 3.5%s slowed 28.2% to 18.9 CPR from 25.4 CPR.
Ginnie Mae speeds slowed less than conventionals
Overall Ginnie Mae II MBS slowed only 11%, much less of a drop than conventionals. However many government loans are reaching 6 and 7 wala and have a difficult time refinancing before then. Both the FHA and VA have very strict controls that discourage refinancing prior to 6 WALA (FHA) and 7 WALA (VA). The MBA’s government refinance index has been signaling that Ginnie Mae speeds would remain stronger than conventional speeds. An 11% drop is below the 13.5% drop implied by only day count.
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
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