Mortgage Prepayments Expected to Remain Fast in October Report

(Bloomberg) -- The wave of homeowner refinancings sparked by record low rates isn’t likely to slow down anytime soon, according to Wall Street forecasts.

Wells Fargo & Co. mortgage analysts said that Fannie Mae 30-year aggregate speeds could rise 1% with the so-called daycount unchanged at 21 days and the lending rate down a further six basis points. Citigroup Inc. analysts project conventional speeds to increase by 2%, though they forecast government-backed Ginnie Mae II MBS speeds will drop by 7% as buyouts of loans in forbearance slow.

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. As American homeowners do this at par and Fannie 30-year MBS are trading at a premium, this can weigh on performance for investors.

This prepayment wave may have staying power, judging by the Mortgage Bankers Association’s refinance application index, which has remained within an elevated range since March. A confluence of record low lending rates, rising industry capacity, the growing use of technology by lenders and rapidly increasing home prices have come together to create the perfect refinance environment.

Mortgage lenders have responded to the outsized demand. Bank of America Corp. analysts wrote in an Oct. 23 report that originators are adding headcount to increase their capacity at a steady clip, a trend that could soon boost speeds by 14% to 27%.

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