By the Numbers
MBS: Premium speeds poised to come in faster than expected
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September prepayment speeds for conventional MBS look set to deviate from expectations across the coupon stack when reported October 4. Refinances in premium coupons are accelerating due to lower rates, and coupons like 6.5%s should jump roughly 50% this month. Discount coupons, however, are being held back by tepid housing turnover and most coupons should slow 10% to 15%. Yield Book’s projections are not consistent with any of those moves—it expects discounts to move faster and is underpredicting the gains in premiums. The faster than expected premium speeds should be mostly driven by worst-to-deliver collateral that is typically delivered into TBA contracts. That should lift pay-ups over par for specified pools, especially low loan balance pools.
Weekly prepayment data released by Fannie Mae and Freddie Mac is pointing to speeds coming in roughly flat overall, with big increases in premium coupons offset by slower speeds in discounts (Exhibit 1). The left-hand column shows expected speeds from that data, which covers all but the final three business days of September. The biggest pickups are coming in the 6.5%s, which should increase about 50%, and gains are strongest in 6%s through 7%s. The 5.5% coupon, which became refinanceable in early September, should increase around 10% this month, but the bulk of the refinance activity should appear in the October print.
Exhibit 1. Conventional premiums should surge past expectations in September.

Includes all cohorts that are members of Bloomberg’s conventional 30-year MBS index.
Source: Fannie Mae, Freddie Mac, Yield Book, Santander US Capital Markets.
The speed changes from the weekly releases does not line up with Yield Book’s expectations, shown in the middle column. The model expects speeds to rise 10% overall while speeds should be roughly flat. And the model thinks discounts are going to move faster. It likely is factoring in lower lock-in as rates moved lower; that is not appearing in this month’s prepayment data, but the MBA’s purchase index suggests that faster housing turnover could appear in next month’s speeds. In 5.5%s and higher, Yield Book’s expectations are consistently slower than the actual data.
Furthermore, Yield Book was already slow on premiums in August, shown in the right-hand column. Therefore, the gap between model and actual should widen in September. And Yield Book was fast on many discount coupons in August, so that gap should also widen.
There are three days left unreported, so the actual numbers could differ from the data in Exhibit 1. And the weekly releases only cover full prepayments, so changes in buyouts or curtailments could also create some differences. But none of those factors should be large.
It seems likely that the same pattern—premiums faster than expectations, discount slower than expectations—will play out in Ginnie Mae MBS (Exhibit 2). Ginnie Mae does not release intra-month prepayment data to provide guidance in advance of the speed report. But Yield Book’s model was already slow on 5.5%s and above, is projecting only modest increases on 5.5%s and 6%s and thinks speeds will slow on 6.5%s and above. It seems likely that speeds in those coupons will exceed expectations. And in discounts the model was already fast and thinks speeds will move faster, so speeds are likely to come in slower than expected.
Exhibit 2. Yield Book is also likely to underpredict premium Ginnie speeds.

Includes only multiple-issuer pools that are in Bloomberg’s MBS index.
Source: Ginnie Mae, Yield Book, Santander US Capital Markets.
The big driver of faster speeds in premium coupons should be non-specified pools, so a faster than expected print is likely to lift the value of specified pools. Yield Book’s model was slow on various loan balance 6.5%s pools in August but expects many of them to move faster in September (Exhibit 3). This raises the possibility that Yield Book’s forecast on low loan balance speeds my improve in September, while its forecast on worst-to-deliver pools and TBA worsens. Specified pool pay-ups should improve if that happens.
Exhibit 3. FNCL 6.5% loan balance specified pools.

Source: Fannie Mae, Freddie Mac, Yield Book, Santander US Capital Markets.
Like conventionals, Yield Book was slow in August on G2SF 6.5% low loan balance custom pools but expects many of them to prepay faster in September. That should also lift the value of, and pay-ups for, Ginnie Mae specified pools. The Ginnie 6.5%s have already had significant refinance activity and the model error was largest on worst-to-deliver collateral in August.
Exhibit 4. G2SF 6.5% loan balance specified pools.

Source: Ginnie Mae, Yield Book, Santander US Capital Markets.
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