By the Numbers
Fewer refinances slow MBS speeds in December
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 prepayment speeds slowed in December as anticipated by intra-month prepayment data, but model results were all over the place. Speeds came in slow compared to Yield Book’s production model, which many MBS investors use. Yield Book’s experimental model, which many derivatives traders use, was spot-on in aggregate but missed on some higher coupons. And Bloomberg’s model was too slow in almost every coupon, especially premiums. Now could be a good time to own specified pools in FNCL 6.0%s, since the market is currently pricing that TBA to a fast 30.2 CPR breakeven speed.
Conventional 30-year speeds slowed 5.5% at Fannie Mae and 5.7% at Freddie Mac, ending a little above our expectation of a 10% slowdown set at the start of December (Exhibit 1). Discount speeds were roughly unchanged to slightly faster, continuing relatively strong speeds that started in October. Coupons 5.5% and higher all slowed as refinancing activity driven by the September rate rally continued to taper. However, the small rally in late November and early December did bring in some additional refinancing in 6.5%s and above, which muted those slowdowns.
Exhibit 1: December 2024 Agency Prepayment Speeds, % Change
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets
Ginnie Mae speeds slowed more than conventional overall and in cuspy coupons like 5.5%s and 6.0%s. The 5% coupon slowed in Ginnies, while it prepaid slightly faster in conventionals. The reason is that conventional 5%s speeds are mostly coming from housing turnover, but some VA borrowers in Ginnie Mae 5% pools were able to refinance. Ginnie 5% speeds are slowing as the refi opportunity has vanished.
High LTV and 100% Texas pools in the FNCL 6% coupon are available at low pay-ups and are projected to carry better than TBA (Exhibit 2). The dollar roll in this coupon is not special. Its breakeven speed is 30.2 CPR, well above projected speeds for even generic collateral in this coupon. The December print for worst-to-deliver collateral was also well below the breakeven speed. The low pay-ups and short time to breakeven limits the pay-up risk, so now could be an opportune time to add prepayment protection in this coupon.
Exhibit 2. FNCL 6% specified pools with low pay-ups and breakeven times.
As of 1/8/2025. Pay-ups calculated from spec pool prices provided by Bloomberg’s BVAL.
Source: Yield Book, Bloomberg, Santander US Capital Markets.
The intra-month prepayment data, which shows prepayments received each day, provides some insight into the refinance responsiveness of higher coupons. Mortgage rates dropped a bit in late November and early December. The period of low rates did not last long, but the pattern of daily prepayments suggest it influenced speeds in 6.5%s and 7%s (Exhibit 3). This chart plots daily prepayments—annualized to be on the same scale as a CPR—over the course of December for four coupons. Prepayments for the 5.5%s were steady throughout the month, but 6.5%s and especially 7.0%s trended higher. This is most likely the lagged response to the period of lower rates, which didn’t fall enough to entice many 5.5% and 6% borrowers to refinance. The data does suggest that prepays slowed in the last few days of the month, which could be due to the holidays or indicate that refinancing is once again slowing following a local peak. The limited response in 6%s suggests that speeds in that coupon are unlikely to accelerate in January.
Exhibit 3. Higher coupon prepayments increased as the month progressed.
Prepayments adjusted to remove patterns associated with the day of the week and day of the month.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Yield Book’s production model struggled with prepayment speeds in December (Exhibit 4). In aggregate it predicted speeds would increase, not decrease, which resulted in speeds 10.8% faster than actuals. It ranged from 13% to 34% faster in coupons 3% and lower. Higher coupon results were mixed for this model—it was too slow in general but was too fast on 6.5%s. Yield Book’s experimental model was only 0.2% slower than actual overall and was close on most discount coupons. But it tended to be slow on cuspy coupons and fast on premiums. Bloomberg’s model was also accurate on discounts but was too slow in higher coupons and was 6.3% slow overall.
Exhibit 4. FNCL model predicted vs. actual in December.
Positive percent difference means the model was faster than actual. Red cells (dark gray in black & white printing) indicate the model was at least 10% faster than actual; blue cells (light gray) indicate the model was at least 10% slower than actual. Only cohorts included in Bloomberg’s MBS index are included.
Source: Fannie Mae, Freddie Mac, Yield Book, Bloomberg, Santander US Capital Markets.
Yield Book’s production model was also too fast on Ginnie Mae speeds, by 9.3% (Exhibit 5). It was generally fast across the stack. The experimental model was only off by 1.1% overall and was close on most coupons, except for 5.5%s and 6.0%s. And Bloomberg’s model was generally too slow in discounts and premiums, but too fast in the middle of the stack.
Exhibit 5. G2SF model predicted vs. actual in December, multiple issuer pools.
Positive percent difference means the model was faster than actual. Red cells (dark gray in black & white printing) indicate the model was at least 10% faster than actual; blue cells (light gray) indicate the model was at least 10% slower than actual. Only cohorts included in Bloomberg’s MBS index are included.
Source: Ginnie Mae, Yield Book, Bloomberg Santander US Capital Markets.
Outlook
Prepayment speeds should slow around 15% in January as seasonal turnover reaches its annual low point. The early December rally had a modest effect on speeds in 6.5%s and 7.0%s but does not seem poised to push them any faster, and refis in those coupons could slow during January. There is one additional business day (treating Christmas Eve and New Years Eve each as a half-day), which will prevent speeds from falling as much as they would have purely from seasonals.
Cohort-level prepayment data is available here.
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