By the Numbers
Prepayment speeds plunge in April
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 30-year MBS prepayment speeds slowed 20% in April, meeting expectations of a large drop. But speeds on Freddie Mac’s securities fell only 15%, an uncommon prepayment difference between the agencies’ securities. Ginnie Mae II speeds dropped 16%. The difference between the conventional agencies was all about curtailments.
Freddie Mac published a note explaining that some curtailments—partial prepayment of monthly loan principal—had not been previously passed through on a timely basis to MBS investors. By passing the curtailments through, it raised Freddie Mac’s prepayments. Or, put another way, it prevented Freddie Mac’s prepayments from declining as much. The outstanding curtailments came through in the May factors and contributed roughly 0.7 CPR to prepayment speeds. Without that additional principal, Freddie’s prepayments would have dropped roughly 21%, consistent with Fannie Mae’s decline. Almost all MBS securities are currently trading below par so the additional principal benefitted most MBS investors. However, faster prepayment speeds lower the value of interest-only bonds.
Ginnie Mae II speeds slowed 16%, a little less than Fannie Mae’s decline. Lagged FHA mortgage rates did not increase as much as conventional mortgage rates, which may have bolstered FHA speeds. The gap was wider in seasoned cohorts, whose borrowers may also be taking advantage of recent home price appreciation to refinance into a conventional mortgage without mortgage insurance.
A combination of higher lagged mortgage rates and three fewer business days in April than in March led to the drop in speeds. The largest slowdowns were in the 3.5% and 4% cohorts (Exhibit 1). Cohort-level prepayment data is available here.
Exhibit 1: April 2022 Agency Prepayment Speeds, % Change
Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities
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