By the Numbers
What to look for in Monday night’s MBS speeds
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.
Prepayment speeds are set to accelerate this month after rates fell in August and early September, triggering a pickup in refinancing. September speeds should be mostly influenced by August rates, which pushed many borrowers in FNCL 6%s in-the-money. That coupon is poised to have the largest pickup, up to 40%, especially the 2024 vintage. Short closing timelines mean some borrowers that reacted to the September rally could close this month, but most of those prepayments should fall into October. Yield Book’s prepayment model appears likely to track this month’s refinance pickup but could be too fast on discount collateral.
Higher coupons—6%s, 6.5%s, and 7%s—could jump 30% to 40%
The intra-month data releases published during the month currently point to speeds increasing 6.2% (Exhibit 1). However, this data does not include the final four days of the month. Actual prepayments on those days are likely to exceed a simple extrapolation of the daily data. A speed increase around 10% seems more likely, with chance that short lags could push speeds up by as much as 15%. These gains would be almost entirely driven by refinancing in 5.5%s and above.
Exhibit 1: Premiums should rise and discounts slow in September
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. YB Prod is v25.1.
Source: Fannie Mae, Freddie Mac, Yield Book, Bloomberg, Santander US Capital Markets.
Yield Book’s model is projecting faster speeds than the daily prepayments in most of the lower and higher coupons. However, that means Yield Book’s premiums speeds could be close to actual since the daily projections are likely to prove low. But Yield Book is likely to be too slow on 5.5%s. Cuspy coupons have been a persistent trouble area for this model, but this miss could also reflect some 5.5%s borrowers responding to the September rate rally. Yield Book’s speeds are likely to end up too fast in discounts.
Bloomberg’s model is faring better than Yield Book’s in discounts but remains too slow in premiums. For example, BAM has FNCL 6%s slowing by 6%, compared to 28.5% and 43.3% increases from the daily data and Yield Book, respectively. This is caused by issues with its mortgage rate model.
A review of the largest cohorts shows that the 2024 vintage is responding strongest to lower rates in 5.5%s through 6.5%s (Exhibit 2). In the 6%s, for example, the 2024 vintage is likely to increase at least 42.9% to reach 16.9 CPR, compared the 2023s increasing only 22.5% to 15.6 CPR. This is because the 2023 borrowers were able to take advantage of low rates last fall, while many 2024 borrower were not sufficiently seasoned.
Exhibit 2. The 2024 vintage is most rate responsive
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
However, the 7%s and 7.5%s from the 2024 vintage look remarkably tame in September—both coupons are expected to slow, while the 2023s in each coupon should speed up measurably. This could reflect the weaker credit composition of the 2024 vintage in those coupons—it has a lower average credit score and higher average spread-at-origination. The 7.5%s 2024 also tend to have smaller balances.
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