By the Numbers
Discount speeds lead the way higher in February
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. This material does not constitute research.
Conventional 30-year prepayment speeds increased 10% at both Fannie Mae and Freddie Mac in February. However, the pickup was not primarily due to refinance activity—the largest gains came in lower coupons. For example, the 2.0%s and 2.5%s each jumped roughly 15% at each agency, while higher coupons like 6.5%s only increased 2% to 3%. Day count was slightly lower in February, so this suggests there was a stronger pickup in housing turnover than the typical seasonal change. This is the second consecutive month with faster-than-expected speeds in discount pools.
Ginnie Mae II speeds increased 13% overall and followed a similar pattern as conventional, with the largest gains coming in lower coupons. The speed increases in discount coupons were generally stronger in Ginnies than conventionals, while pickups were similar in higher coupons. For example, G2 3.0%s increased 14.1% compared to 5.7% at Fannie and 10.4% at Freddie, while G2 6.5%s increased only 0.5% compared to 2.7% and 1.8% at the two GSEs. Discount speeds generally increased in both the FHA and VA programs.
In premium coupons, speeds of VA loans more than seven months seasoned were generally the same month-over-month in higher coupons while FHA speeds ticked up modestly. However, expect speeds in these coupons to move faster even if rates don’t change, since more loans originated in the second half of 2023 will season enough to access a streamlined refinance. But there wasn’t evidence that speeds of VA loans already seasoned enough to refinance moved even faster.
The price reaction after the report generally favored Ginnie Mae MBS as the G2/FN swap edged higher across the stack. Up-in-coupon performance was especially strong in conventional and Ginnie Mae MBS as both programs delivered better than expected prepayment speeds in those coupons; the market had feared a much stronger refinance response.
Speeds in March (April report) should increase 20% as housing turnover activity generally jumps higher in March. Day count is slightly lower, which will hold speeds back a bit. Turnover could also be restrained by higher lagged mortgage rates. The MBA’s purchase application index fell in February, which suggests that the typical seasonal increase may be muted this month.
Cohort-level prepayment data is available here.
Exhibit 1: February 2024 Agency Prepayment Speeds, % Change
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets
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.
