Prepayment Speeds Hit Seasonal Lows, but March Could Bring a Rebound

Prepayment speeds, aka how quickly borrowers pay off their loans ahead of schedule (whether through refinancing or selling their homes), for Fannie Mae 30-year mortgage-backed securities (MBS) slowed by 1 percent in February, reaching a 5.0 conditional prepayment rate (CPR - the percentage of a loan pool that is likely to be prepaid within a given year. It is expressed as an annualized percentage and helps investors gauge the speed at which borrowers are refinancing, selling their homes, or otherwise paying off their mortgages ahead of schedule.), the lowest level since last March. 

February typically sees the slowest prepayment activity of the year due to seasonal factors, so this decline wasn’t unexpected. However, even beyond seasonal trends, prepayment activity remains subdued, with speeds only 8.7 percent higher than a year ago. The 30-year conventional mortgage rate, tracked by Optimal Blue, dropped by 24-basis points to 6.60 percent in February, its lowest level since September. This slight dip in rates led to a 34.2 percent rise in refinance activity, but overall, refinancing remains relatively low. Within the MBS market, higher-rate loans (6.0 percent to 7.5 percent coupons) experienced the sharpest prepayment slowdowns, dropping between 10 percent and 19 percent from the previous month. Lower-rate loans (1.5 percent to 5.5 percent coupons) barely moved, reflecting their lack of refinancing incentives. On the Ginnie Mae II side, overall prepayment speeds dropped 5 percent to 7.1 percent CPR, with buyouts—where delinquent loans are removed from pools—now running at nearly twice the rate they were in March last year.

Looking ahead, just 5.5 percent of homeowners in agency-backed MBS have at least a 50-basis-point incentive to refinance, up from 3.6% in prior months but still well below the 9-10 percent range seen last summer. This means that prepayments are likely to remain low, as most mortgages are still "out of the money," meaning borrowers wouldn't save enough to justify refinancing. However, March's report is expected to show a moderate uptick in prepayment activity due to an increase in business days from 19 to 21 and seasonal factors that historically boost speeds during this time of year. While most loans will remain locked in at their existing rates, higher-coupon loans (where refinancing is still somewhat attractive) are expected to see the most movement. Overall, despite a potential 15 percent increase in aggregate speeds next month, the broader trend of slow prepayment activity is expected to persist.