By the Numbers
More evidence of a fast trigger, fast burnout in MBS
This material is a Marketing Communication and does not constitute Independent Investment Research.
Mortgage refinancing slowed in December for the second month since surging in October. Prepayments can pick up quickly when rates drop, especially for recently originated loans that become refinanceable for the first time. But speeds also are burning out quickly. A likely explanation is originators need less time to close loans due to better origination technology. This pulls prepayments forward, lifting speeds at the start of a rally but suppressing them in following months.
This pattern is likely to play out the next time rates fall, which may happen soon. FNCL 5.0%s outperformed hedges by roughly 12/32s on the day after President Trump posted on Truth Social that he was directing his representatives to purchase $200 billion in mortgage bonds. That should lower mortgage rates by roughly 10 bp, although the market response could change as the FHFA, Fannie Mae and Freddie Mac release more details. And this assumes mortgage originators lower primary rates alongside secondary rates; they might let primary-secondary spreads widen.
Overall, speeds in December increased 3% to 5% across Fannie Mae, Freddie Mac, and Ginnie Mae II MBS. There was a large jump in business days—four additional days compared to November. This points, all else equal, to a roughly 20% increase. But speeds fell short of this across the stack. Most importantly, coupons like 5.5%s, 6.0%s and 6.5%s prepaid almost the same in November and December, suggesting that slower refinancing neutralized the effect of day count. For example, FNCL 6.5%s increased only 3.5% to 32.0 CPR from 31.1 CPR.
Exhibit 1. December 2025 Agency Prepayment Speeds, % Change
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
Speeds in lower coupons increased, driven by the pick-up in day count. However, the month-over-month increases fell short of the roughly 20% increase expected from day count. Seasonal factors are usually similar in November and December. Taken together, this suggests prepayments from housing turnover were also light in December. For example, FNCL 2.5%s increased 11%, to 5.2 CPR from 4.7 CPR.
Yield Book’s experimental prepayment model was faster than actual in December (Exhibit 2). That is a big reversal from October, when the model was slow. Yield Book’s model may be capturing the shape of the average prepayment S-curve but failing to account for the timing changes from shorter lags and stronger burnout; that would explain this pattern. Bloomberg’s model continues to be too slow in premium coupons, likely caused by its mortgage rate model.
Exhibit 2. FNCL model predicted vs. actual
Shaded cells are more than 10% different from speeds inferred from the daily prepayment report. Blue indicates the model is slower, red indicates the model is faster. Yield Book v97 is the latest experimental model released in October 2025.
Source: Fannie Mae, Freddie Mac, Yield Book, Bloomberg, Santander US Capital Markets.
Yield Book’s experimental model repeated its solid performance on Ginnie Mae MBS (Exhibit 3). Like the conventional model, it tended to be slow in higher coupons and fast in lower coupons. But errors were generally less than 10%.
Exhibit 3. G2SF model predicted vs. actual, multiple issuer pools
Shaded cells are more than 10% different from speeds inferred from the daily prepayment report. Blue indicates the model is slower, red indicates the model is faster. Yield Book v97 is the latest experimental model released in October 2025.
Source: Ginnie Mae, Yield Book, Bloomberg, Santander US Capital Markets.
Slower speeds are reflected in monthly S-curves (Exhibit 4). This compares S-curves in October, November and December, and uses October 2024 and 2020–2021 as reference for two earlier refinance events. The S-curves are scaled to account for day count differences. S-curves flattened in November and again in December; the December S-curve was flatter than October 2024 for deep in-the-money loans.
Exhibit 4. S-curves have flattened since the October prepayment peak
S-curves scaled to account for monthly differences in business days.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Prepayment outlook
Lagged mortgage rates have hardly changed since October (Exhibit 5). Using a 21-day lag or a 30-day lag shows that lagged mortgage rates varied by at most 4 bp across November, December and January, regardless of the lag. And rates in those three months are 10 bp lower than October, yet speeds slowed. The table incorporates a projected 10 bp rate decline, consistent with secondary market pricing late Thursday. This would have minimal effect on January, but the February rate drops to 5.93% using a 21-day lag. That would show up in the March report. This may not have much effect on speeds in aggregate. But some loans originated in the first half of 2025 will be entering their first refinance opportunity, and those could pick up more.
Exhibit 5. Lagged mortgage rates have been stable
As of 1/7/2026 and assumes mortgage rates drop 10 bp on January 8.
Source: Optimal Blue, Santander US Capital Markets.
For January speeds, the main drivers are day count and seasonals, and both are moving slower. Together they should drop speeds by 20% to 25%.
Refinanceability update
A 10 bp drop from a 6.03% mortgage rate to a 5.93% mortgage rate would mostly affect 5.5% and 6.0% cohorts from 2023, 2024 and 2025. Recently issued pools with loans less than 6 months of seasoning should have some prepayment protection, but loans originated in early 2025 are likely facing their first refinance opportunity with sufficient seasoning.
Exhibit 6. Conventional cohort refinanceability
Refinanceability is share of cohort that is at least 75 bp in-the-money to refinance.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
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