Ginnie Mae prepayment speeds continue to increase
admin | January 10, 2020
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.
Ginnie Mae prepayment speeds rose in December after the MBA Government Refinance Index signaled for months that Ginnie Mae will outpace conventional MBS. Many Ginnie Mae loans had trouble refinancing until recently due to hard constraints on refinancing in the first six to seven months after origination. Conventional speeds came in virtually unchanged and right on expectations. The race between Ginnie Mae and conventional MBS continues.
Slightly higher lagged interest rates and seasonally slower housing turnover both pushed speeds slower in December, but this was offset by an additional one-half business day.
Exhibit 1: Ginnies prepay faster in December, while conventionals slow slightly
Note: % change in 30-year prepayment speeds from November 2019 to December 2019. Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Across the stack coupons below 5.0% also had fairly unchanged speeds in December. Higher coupons tended to prepay faster. Most of these loans were originated in late 2018 and early 2019, and are still taking advantage of significantly lower rates. More seasoned loans with these coupons also prepaid faster, but this was primarily due to by higher day count.
Prepayment speeds should slow in January by roughly 5 to 10%. January is often the slowest month of the year since housing turnover hits the seasonal low point and even refinancing tends to decline. An additional 1.5 business days helps prevent speeds from dropping too much, while driving rates are roughly the same. Speeds should increase slightly in February before jumping significantly higher in March. Ginnie Mae pools should continue to prepay faster than conventionals.
The refinance index dropped, but don’t be fooled
Mortgage rates have been relatively stable for the past few months. Since mid-October the Freddie Mac Primary Mortgage Market Survey rate has stayed within a 14 basis point range. As a result the refinance index was also relatively stable.
This changed during the week ending December 27, when the index plummeted 30%. There was a small bounce back January 3. But this likely does not signal that prepayments will drop by that amount, since both of these weeks are influenced by the Christmas and New Year holidays. The MBA incorporates a large day count correction in the index, but holiday weeks tend to be less reliable. Prepayment speeds are unlikely to drop that much, and the index will likely rebound closer to the pre-holiday levels.
The Fannie Mae and Freddie Mac numbers
Both Fannie Mae and Freddie Mac 30-year MBS speeds were virtually unchanged from November, as Fannie speeds slowed 1% and Freddie speeds slowed 2%. Higher coupons, however, prepaid faster. For example, Fannie 5.0%s increased 4.6% and 5.5%s jumped 10.6%. Much of this is attributable to loans originated in early 2019 when interest rates were much higher. One example are 5.0%s 2019, which increased 9.3% to 24.8 CPR in December.
Ginnie Mae speeds prepaid faster in December
Ginnie Mae II speeds picked up in December, increasing 5.0% to 23.3 CPR from 22.3 CPR. The MBA refinance index has been signaling that Ginnie speeds would increase their gap to conventionals. The difference comes from loans originated before the 2019 interest rate rallies; many of these loans were prevented from refinancing due to FHA and VA rules.
The prepayment data illustrates how this is true. For example, 3.5%s 2019 jumped 65.5%. The bulk of this increase came from the May 2019 issue pools, which increased 507% to 36.0 CPR from 8.3 CPR. The same thing happened in 4.0%s—overall the coupon increased 35.7%, most of this came from a 438% pickup in the May 2019 pools.
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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