By the Numbers
A new window on monthly MBS prepayments
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 in the last week started releasing daily prepayment information for the first time. Every Wednesday at 4:30 pm ET, the two companies will release numbers for the prior week, providing investors with an early look into the upcoming month’s prepayment speeds. While the inaugural release only covered a single day, Freddie Mac also posted a file of historical daily prepayments going back to 2019. Those numbers show that more prepayments are received near the end of the month, so simple extrapolation from prepayment information at the start of a month will typically underestimate monthly speeds.
The daily prepayment data appears to follow weekly and monthly patterns. The patterns show in the percentage of each month’s prepayments received on each day of the month (Exhibit 1). This helps control for month-to-month prepayment variation due to changes in mortgage rates and annual seasonality from housing turnover. The chart suggests that more prepayments are received on certain days each week and there is often an increase near the end of the month.
Exhibit 1: Daily prepayments move up and down during the month.
Source: Freddie Mac, Santander US Capital Markets
More prepayments are received on Tuesday and Wednesday than the other days of the week, for example (Exhibit 2). Applying a time series filter to the numbers isolates shifts in prepayments during the week from the broader trend over the course of the month. This weekly series was aggregated by prepayment year. While it was relatively stable from year-to-year, somewhat more prepayments were received on Wednesday and fewer on Monday in 2020 and 2021.
Exhibit 2: More payoffs are received on Tuesday and Wednesday.
Source: Freddie Mac, Santander US Capital Markets
Removing the weekly prepayment variation shows that more prepayments are received near the end of the month (Exhibit 3). This chart plots the percentage of prepayments received against the number of days remaining in the month. The data is aggregated separately based on the number of business days in each month. Prepayments typically slow after the second day of the month and stay low for about a week, before increasing throughout the remainder of the month.
And prepayments typically peak a few days before the end of the month.
Exhibit 3: More prepayments are received near the end of the month.
Source: Freddie Mac, Santander US Capital Markets
The first data released by Fannie Mae and Freddie Mac included only one day of data—Friday, March 3. The beginning of the month is typically a little below the monthly average, and that is especially true this month since that day is a Friday. A simple extrapolation from that data point would likely underestimate the final March speed.
The Fannie Mae and Freddie Mac numbers track the servicer reporting cycle, so each prepayment month begins after the second business day of one month and ends on the second business day of the following month. For example, the April factor report includes prepayments received from March 3 through April 4. The enterprises will post monthly factors on April 6, but the weekly file that contains the final two days of the month—April 3 and 4—will not be posted until April 12. The daily prepayment information is at the cohort level—product, coupon, and vintage. Small cohorts will be excluded.
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.
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