Biden or Trump, Mortgage Prepayments Look Set to Remain Robust
(Bloomberg) -- Despite the uncertainty over who will next call the White House home, one thing seems certain -- mortgage bond investors will still face robust prepayment speeds at least over the near term.
The Mortgage Bankers Association Refinance index took a 6.4% leap higher for the week ended Oct. 30, and is now up 19.1% since the end of August, according to a report on Wednesday. Looking at the government and conventional sub-indexes, the increase has been 32.4% and 15.2%, respectively.
Eventually, most of those refinance applications will translate into prepayments on mortgage bonds as old loans get paid down and new ones get created.
A 30-year Freddie Mac mortgage rate of 2.81% -- laughably low by historic standards -- looks set to keep the refi fires burning brightly. Average bond forecasts project the U.S. 10-year yield ending this year at 0.76%, little changed from its current level, according to data compiled by Bloomberg.
In September, aggregate Fannie Mae 30-year prepayment speeds increased to 35 CPR, their fastest since April 2004. This means that should the current level hold, about 35% of the principal balance within those mortgage-backed securities will be prepaid annually. With American homeowners paying off their mortgages at par and Fannie 30-year MBS trading at a premium, performance for investors can suffer.
October prepayment speeds will be released late Thursday afternoon, and they are likely to remain fast. However, Morgan Stanley analysts are looking for prepays to decrease on average by 7% for UMBS 30s and 3% for Ginnie Mae II 30-years.
- Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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