By the Numbers
Big refi index jump caused by more than low rates
This material is a Marketing Communication and does not constitute Independent Investment Research.
Mortgage rates have dropped to the lowest level of 2025, pushing the risk of refinancing higher. One sign of this comes from the MBA’s refinance index, which has jumped nearly 80% since the end of August. The index is also about 40% higher than it reached last fall, even though mortgage rates are not as low as last year. The stronger response can be largely explained by changes in the composition of 30-year 6.0% and 6.5% coupons—they are much larger and more seasoned. The larger size brings more volume but not faster speeds. However, the added seasoning should lift speeds, particularly for’ loans originated after roughly April 2024.
The MBA refinance index has jumped to the highest level in the last two years (Exhibit 1). Each index—conventional, FHA, VA and total—is rescaled to 100 at the start of the series. The VA index is much higher than the conventional and FHA index, reflecting the stronger refinance response of these borrowers and the lower mortgage rate these borrowers receive when refinancing.
Exhibit 1. MBA refinance indices (rescaled to 100 two years ago)
Source: Mortgage Bankers Association, Bloomberg, Santander US Capital Markets.
The refinance index is up because mortgage rates have dropped (Exhibit 2). However, conventional, FHA and VA rates were each lower in September 2024. But the refinance response is stronger today.
Exhibit 2. Primary mortgage rates
Mortgage rate calculated using rate lock data from Optimal Blue and an adjustment to calibrate to observed loan originations. Conventional rates are based off the FICO≥740, Orig LTV≤80 index.
Source: Optimal Blue, Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
One reason the refinance index is higher than one year ago is that the in-the-money coupons are larger. The 30-year 6.0% coupon, for example, is about 50% larger than it was last October. Overall, the in-the-money population is 20% larger even though mortgage rates are higher. That growth will contribute to greater refinancing volume and lift the refinance index. But it should not influence prepayment speeds.
However, speeds should be lifted by additional seasoning in the in-the-money coupons. Many loans were not seasoned enough to refinance quickly last fall. They should prepay much faster today after a year of extra seasoning. For example, the balance of loans in the 6.0% coupon that is at least six months seasoned has grown 75% over the last year.
In total, the balance of in-the-money loans that are at least six months seasoned has grown 44%. On a loan count basis—which is a better comparison to the refinance index—this population has grown 40%, which is in-line with the refi index increase from last fall to today.
Loans less than six months seasoned have been refinancing at roughly 50% of the pace of more seasoned loans (Exhibit 3). The two S-curves for loans less than 6-months seasoned are very similar, as are the S-curves for loans more than 6-months seasoned. Peaks speeds have been in the 9-to-18-month range. The added seasoning should lift speeds in affected cohorts compared to last year—specifically, loans originated after roughly April 2024. The 2023 vintage, and early 2024 issuance, should be less affected by the greater seasoning.
Exhibit 3. Newly originated loans have a muted refinance response
Fixed rate, 30-year, owner occupied, ≥700 FICO, ≤80 Original LTV. Performance from January 2023 to August 2025.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
At current rates, the 5.5% cohorts are roughly 10% to 15% refinanceable (Exhibit 4). This uses a 75 bp threshold to determine moneyness, to pick out only loans that have a clear incentive to refinance. To be conservative it includes all loans regardless of seasoning. The 6%s are about half in-the-money, and higher coupons are almost fully in-the-money. Further rallies should have a much larger effect on speeds in 5.5%s and 6%s than on higher coupons.
Exhibit 4. Conventional 30-year % in-the-money by cohort
Loans must be at least 75 bp in-the-money.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Ginnie Mae MBS tend to be somewhat more in-the-money than conventional MBS, since FHA and VA mortgage rates are lower than conventional (Exhibit 5). Partially offsetting this are higher gross coupons in conventional MBS compared to Ginnie Mae MBS. But expect a stronger prepayment response in Ginnie 5.5%s since more VA loans are in-the-money and those S-curves are much steeper.
Exhibit 5. Ginnie Mae 30-year % in-the-money by cohort
Loans must be at least 75 bp in-the-money.
Source: Ginnie Mae, Santander US Capital Markets.
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