By the Numbers
Prepayment speeds slow to their lowest levels since May
Brian Landy, CFA | February 5, 2021
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.
Conventional 30-year prepayment speeds slowed 14% in January, reaching the lowest level since May. This reflected a combination of fewer business days and seasonally slower housing turnover while refinance activity held steady. Ginnie Mae II speeds also fell 14%, a combination of slower voluntary prepayments and fewer buyouts. These slowdowns lined up with Amherst Pierpont expectations of a 10% to 15% decline though slightly more than the Street consensus of a 10% decline. Prepayment speeds should increase around 5% in February before the typical jump higher in March. Still, January’s results should improve return prospects for 30-year 3.0% and other pass-through trading lately at high prices and with negative carry.
The refi index crosses 4,000
The MBA refinance index has rarely moved higher than 4,000 since April, and when it did it quickly fell. However, the index has averaged roughly 4,500 over the past four weeks despite higher mortgage rates. The relationship between the Freddie Mac Primary Mortgage Market Survey Rate and the refinance index is shown in Exhibit 1.
Exhibit 1: The refi index jumped above 4,000 in January despite higher mortgage rates.
The survey rate has not been a reliable indicator of true mortgage rates since the pandemic began, but it is unlikely that the survey rate increased at the same time that the origination rate fell. Often borrowers waiting for a low in interest rates will get scared into locking if interest rates move higher, fearing they missed the bottom. It is possible this is happening now, but the effect on prepayment speeds would only last a couple of months. Another possibility is that the index is reflecting pent-up demand from borrowers that were unable to refinance while in forbearance last year. Many borrowers exited forbearance in the second half of the year and may have made three payments on their post-forbearance resolution—repayment plan, payment deferral, or loan modification—allowing them to refinance. Some may have decided that a refinance makes sense.
Prepayment speeds could increase as much as 5% in February. Day count is unchanged and seasonal turnover is typically similar, but the recent increase in refinance activity should lift production in February and March. March is typically a much faster month and this year should not be an exception, with speeds set to increase roughly 25% over February. Higher day count and a pickup in seasonal turnover are the major drivers.
The Freddie survey rate is still overstating mortgage rates by about 10 bp compared to the long-run average. The spread between primary and secondary mortgage rates is currently about 30 bp wider than the 2019 average, but that falls to 20 bp after correcting for the error relative to the origination rate. Accounting for the December guarantee fee increase reduces the difference another 12.5 bp (assuming a 4x IO multiple), leaving 7.5 bp of room for lenders to tighten spreads.
Exhibit 2: The survey rate remains about 10 bp wide compared to originated rate.
Ginnie Mae buyouts fall
Fewer loans were bought out of Ginnie Mae MBS in January, contributing to the overall slowdown in Ginnie Mae prepayment speeds. Most of the large banks continued their pace of fast buyouts, with the most notable exception of Flagstar. Over 16% of Flagstar’s loans are at least 60 days delinquent. Most bank servicers’ delinquent loan pipelines have fallen close to pre-Covid levels. Overall buyout-driven prepayment speeds (Exhibit 3, CBR—conditional buyout rate) fell nearly 2 CPR to 5.0 CPR.
The biggest move in the non-banks was a slowdown in buyouts by Lakeview, which had jumped the prior month. The other notable change was an increase in buyouts by Home Point Financial. Most other non-bank servicers bought out loans at a similar or slightly slower pace. Overall non-bank buyout speeds also slowed roughly 2 CPR, to 5.7 CPR, but most servicers still have elevated delinquent loan pipelines and the risk of a pickup in buyouts remains. Many of these loans will exit forbearance in March and April, so servicers do not have much time left to secure financing to buyout those loans.
Exhibit 3: Ginnie Mae servicers with the largest volume of buyouts.
The Fannie and Freddie numbers
Fannie Mae and Freddie Mac 30-year MBS each slowed 14% in January, due to a combination of lower day count and seasonally slower housing turnover. Speeds fell in most cohorts and coupons overall by similar amounts, which is typical when day count is the primary reason prepayment speeds change. The 2020 vintage cohorts are the exception, as speeds continue to pickup in the 2% and 2.5% cohorts. However, the 3% 2020 cohort only increased 1% and may be peaking. This cohort is unlikely to reach the speeds of the 3% 2019 cohort, which has a much higher average loan size.
Exhibit 4: Lower day count, turnover, and buyouts pull speeds down in January.