Prepayment speeds for loans included in agency mortgage-backed securities were up approximately 20% both monthly and annually during May as the decline in interest rates boosted activity, a report from Keefe, Bruyette & Woods said.
While the normal seasonal pick up in early mortgage payoffs stemmed from those selling their home during the spring buying season, the continuing decline in interest rates brought more borrowers into the money when it comes to refinancing.
"We expect a rate-driven refi wave and seasonality will contribute to elevated speeds through at least the remainder of the summer," said KBW analyst Bose George in the report.
Approximately 20% of agency fixed-rate mortgages are currently in the money to refinance, with the vast majority being loans originated in the past two years. Rates fell below 4% for the 30-year FRM
If 30-year rates were to fall to the 3.5% range, it would bring loans originated in 2017 into the mix, and then half of the existing mortgages would be refi eligible, George said. There was a 13.2 constant prepayment rate for May for Fannie Mae MBS, up from
But the rise in prepayment speeds had a minimal effect on mortgage servicing rights valuations so far. This is because the decline in mortgage rates lagged the drop in the 10-year Treasury yield, George said. MSR values are down between 3% and 4% in the second quarter to date.
Mortgage rates have not gone down as much as the yields on Treasurys, so the spreads between them have widened given rate volatility, George explained. Plus because it is selling season, originators generally don't pass on as much of the benefit from the lower yield to a borrower since their origination capacity is already being utilized.
"As interest rates stabilize, spreads usually tighten which should result in mortgage rates normalizing versus Treasurys" as the year continues, George said.
