By the Numbers

Prepayment speeds move slower in July

| August 6, 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.

Fannie Mae and Freddie Mac MBS prepayment speeds fell roughly 10% in July, at the slow end of Street expectations and another sign of burnout in MBS. Lagged mortgage rates held steady near 3%, which should have kept refinance volume steady. But speeds fell by more than the 5% implied by one fewer business day. The biggest slowdowns came in 30-year 3.5%s through 4.5%s, including seasoned vintages, another sign that fewer borrowers in those cohorts are willing to refinance at current mortgage rates. And the GSEs’ new refinance programs for low-income borrowers continue to see little uptake, a sign those programs will not broadly raise prepayment speeds.

The refi index continues to indicate burnout

Mortgage rates fell throughout July, and the MBA Refinancing Index moved higher. Recent mortgage rate surveys from Freddie Mac show a mortgage rate near 2.75%, and the refi index has bounced to slightly more than 3,600 (Exhibit 1). However, the refi index was consistently near 4,000 when rates reached these levels last year and reached as high as 4,700 in January and February. This suggests originators are struggling to generate refinance business at these mortgage rates. Many borrowers refinanced at these rates last year, and the ones that did not refinance are proving less willing to do so now. This is a good sign for investors holding very high coupon pools that had remained stubbornly fast.

Exhibit 1: The MBA refi index is still low for the level of mortgage rates

Source: MBA, Bloomberg, Amherst Pierpont Securities

Home purchase activity slowed further in July

The housing market has been on fire for most of the pandemic. Prices have surged higher, and homes have been selling at a rapid pace. But this has caused the for-sale inventory to fall to record low levels. As a result, purchase activity has fallen over the last few months and continued downward in July (Exhibit 2). Recent purchase activity is consistent with activity in 2019. This should contribute to slower prepayment speeds across the coupon stack, boosting extension risk in MBS.

Exhibit 2: The MBA purchase index fell in July

Source: MBA, Bloomberg, Amherst Pierpont Securities

Looking ahead

MBS prepayment speeds should increase roughly 15% in August due to lower lagged mortgage rates, the Federal Housing Finance Agency’s recent decision to remove the 50 bp adverse market refinance fee and one additional business day. Lagged mortgage rates fall 13 bp to roughly 2.8%, which should increase refinancing activity. And removing the refinance fee is equivalent to lowering mortgage rates by roughly 12.5 bp for many borrowers. However, borrowers have had the opportunity to refinance at these mortgage rates before, which will limit the refinance response and is evidenced in the MBA refi index. Speeds should be unchanged in September, assuming mortgage rates stay near 2.75%, before slowing due to seasonally lower housing turnover in the fall.

The RefiNow program continues to get little use

Very few loans were originated during the first two months of Fannie Mae’s RefiNow program (Exhibit 3). Only 0.27% of all rate or term refinances pooled from June 4 through August 5 used the program. This program, and Freddie Mac’s Refi Possible program, are geared towards borrowers that lost income during the pandemic and no longer qualify for a traditional refinance. Fannie Mae started identifying loans that come through this program in June, while Freddie Mac plans to do so in September

Investors have been concerned that a new refinance program could significantly boost prepayment speeds, and a second month of low issuance should help calm those fears. Borrowers that used forbearance during the pandemic are the most likely to need these programs to refinance. But the programs do not appear to have much appeal to borrowers that could already refinance using existing offerings.

Exhibit 3: Very few loans were originated using RefiNow in July

Data on pools issued from 6/4/2021 through 8/5/2021. Percentage by balance.
Source: Fannie Mae, eMBS, Amherst Pierpont Securities

The top portion of the exhibit shows purchase and refinance volume through each of the three programs as a percent of total production. The bottom half of the exhibit shows the percent of each loan purpose that comes from each program. The RefiNow program accounted for only 0.10% of total issuance, and 0.27% of total rate and term refinance issuance, from June 4 through August 5.

Ginnie Mae prepayment and buyouts slowed in July

Ginnie Mae II speeds slowed 7.3% in July, due to a combination of slower voluntary prepayments and fewer buyouts. Voluntary prepayment slowed the most in 4% and 4.5% coupons. Like conventional speeds, many seasoned cohorts slowed more than the 5% implied by fewer business days. Buyout rates dropped 22%, primarily due to slowdowns at PennyMac and Caliber (Exhibit 4).

Exhibit 4: Ginnie Mae servicers with the largest delinquent pipelines

CRR—conditional repayment rate (voluntary prepayments); CBR—conditional buyout rate.
Source: Ginnie Mae, Amherst Pierpont Securities

The Fannie and Freddie numbers

Fannie Mae and Freddie Mac prepayment speeds each slowed roughly 10% in June, at the low end of street expectations (5% to 10% slower) and at the high end of the Amherst Pierpont forecast of a 10% to 15% slowdown (Exhibit 5). Lagged mortgage rates held steady just below 3% but the MBA refi index had been falling, pointing to slower speeds. The MBA purchase index also pointed to slower housing turnover. And there was one fewer business day.

Exhibit 5: MBS prepayment speeds slowed in July

% Change in 30-year prepayment speeds from June 2021 to July 2021
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities

Data Tables

Exhibit 6: Prepayment Summary

Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities

Our short-term forecast is shown in Exhibit 9 (Fannie Mae) and Exhibit 10 (Freddie Mac). Exhibit 8 shows the static rates used in the prepayment forecast.

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

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 © 2024 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.

The Library

Search Articles