By the Numbers
Look for slower speeds with lots of negative convexity
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The mortgage market has a lot of negative convexity in it at current rates. A move 50 bp higher would likely slow speeds roughly 5 CPR while a move 50 bp lower would boost speeds roughly 10 CPR. For now, MBS prepayment speeds should come in roughly unchanged in December, before slowing in January and February.
The Freddie Mac Primary Mortgage Market Survey rate has been hovering near 3.10% for the last few weeks, while indices derived using Black Knight’s Optimal Blue rate lock index shows the average borrower locked a rate around 3.35%. At those rates, only 32% of the MBS universe is at least 75 bp in-the-money to refinance. That suggests speeds in January and February should fall to roughly 17 CPR to 18 CPR. December speeds, however, should be about the same as November speeds—mortgage rates are slightly higher on a 45-day lag, but there is also an extra business day.
The MBA refinance index is also pointing to slower speeds, as it recently fell below 2,500 for the first time since January 2020 (Exhibit 1). The government index is converging with the conventional index, erasing the gap that has been present since the 2019 refinance wave.
Exhibit 1. The MBA refinance index is at the lowest level since January 2020
Source: Mortgage Bankers Association, Freddie Mac, Amherst Pierpont Securities
The refi index is showing some signs of burnout (Exhibit 2). The most recent few readings, shown as green diamonds, are lower than the levels in October even though the rate incentives were similar. However, the index remains above pre-pandemic levels at those incentives.
Exhibit 2. The MBA refinance index is showing some signs of burnout
Source: Mortgage Bankers Association, Freddie Mac, Amherst Pierpont Securities
Conventional 30-year prepayment speeds, averaging Fannie Mae and Freddie Mac, fell to 19.3 CPR. This was below 20 CPR for the first time since February 2020 (Exhibit 3). Only 41% of the MBS universe was at least 75 bp in-the-money to refinance. The result was almost identical to September 2019, when 41% of MBS were in-the-money and aggregate speeds were 19.6 CPR.
Exhibit 3. History of conventional 30-year prepayment speed
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
At current mortgage rates only 32% of MBS are in-the-money. This should pull January speeds down to roughly 17 or 18 CPR (Exhibit 4). But there is a lot of negative convexity at these levels. If interest rates were to increase 50 bp speeds would drop to roughly 12 CPR, but a 50 bp drop could push speeds up to roughly 27 CPR.
Exhibit 4. Projected moneyness and speeds at different rate levels
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
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