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Agency prepayments set to double by mid-summer
admin | March 6, 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. This material does not constitute research.
Overall agency MBS prepayment speeds could reach 35 CPR by mid-summer if mortgage originators add production capacity and currently wide spreads between primary and secondary mortgage rates collapse. That pace would represent more than double the pace just reported for February.
Fannie Mae and Freddie Mac 30-year prepayment speeds both increased in February, coming in a little more than expected. Fannie Mae speeds increased 14% and Freddie Mac speeds jumped 16%, suggesting borrowers were able to close refis on pretty short lags. Unsurprisingly, lower coupons increased the most.
Faster speeds were anticipated since lagged interest rates had fallen roughly 12 bp using a 30-day lag, but the pickup in speeds was muted due to fewer business days in February.
Ginnie Mae II speeds came in flat in aggregate. Ginnie II 3.0%s and 3.5%s prepaid 9% and 7% faster, respectively, which was a much lower pickup than the corresponding conventional cohorts. Ginnie II 4.0%s
through 5.5%s all prepaid slower. Ginnie Mae speeds had increased throughout the fall and winter even though conventional speeds had fallen, so Ginnie Mae MBS were less sensitive to the relatively small drop in lagged interest rates.
Exhibit 1: Percent changes in agency prepayment speeds in February 2020
Note: The numbers are % change in 30-year prepayment speeds from January 2020 to February 2020.
Looking ahead, prepayment speeds should pick up considerably. The bulk of the January interest rate move should play out in March speeds reported in April and should bring a roughly 45% increase in speeds. The most recent move should predominantly affect April and May speeds. If rates remain at current levels then April speeds should increase another 25% over March. Primary/secondary spreads have skyrocketed as originators have limited capacity, which is keeping speeds from moving much faster.
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