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Newer mortgage loans drive increase in prepayments: KBW

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Agency mortgage-backed security prepayment speeds increased in February with much of the refinance activity coming from newer loans and those with high coupons, a report from Keefe, Bruyette & Woods said.

For February, there was a 10% increase in prepayment speeds for 30-year fixed-rate mortgages to a 7.2 constant prepayment rate from a 6.6 CPR in January. The pickup was driven by the rally in mortgage rates during December and the corresponding increase in refinance applications (as measured by the Mortgage Bankers Association) in early January, KBW said. The absolute level of refinance activity remains very low, the report added.

The increase also occurred even though there were two fewer business days in February (19 versus 21 in January). In addition, borrowers whose note rate was 5% or higher took advantage of the opportunity to refinance.

Much of the refi activity was concentrated in loans that had two years or less seasoning. For example, 30-year Fannie Mae securities with a 4.5% coupon in the 2018 vintage paid down at a 10 CPR in February, compared with a 7.3 CPR for January. But more seasoned loans with a similar coupon dropped in the prepayment speed from the previous month, KBW said.

For all vintages and coupons, 30-year fixed-rate Fannie Mae prepayment speeds increased to 7.2 CPR from January’s 6.6 CPR. For 30-year loans included in Freddie Mac securities, the prepayment speed increased to 7.1 CPR from 6.5 CPR in the previous month.

“We note that some stakeholders have voiced concern around differences in prepays between the two agencies ahead of the uniform MBS going live on June 3, 2019,” the KBW report said. “However, we don’t expect the UMBS to have a material negative impact on mortgage REITs [which invest in MBS], and we view the deeper liquidity in agency MBS as a result of UMBS possibly being supportive of the mortgage basis longer-term.”

Government-insured mortgages continued to prepay at higher speeds than conforming loans. The prepayment speed on 30-year fixed-rate Ginnie Mae loans was up 16% in February from January, to a 10.1 CPR compared with an 8.7 CPR.

Ginnie Mae mortgages with a 4.5% coupon and 20 months of seasoning paid down at a 21.9 CPR, compared with 18.5 CPR in January. Ginnie Mae previously expressed concern regarding high prepayment speeds, especially with Veterans Affairs-guaranteed loans.

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