Prepayment speeds were up 22% in May on seasonality

Mortgage-backed securities prepayment speeds increased 22% month-to-month in May, but that was largely due to seasonality related to traditional spring buying activity, a Keefe, Bruyette & Woods report stated.

The conditional prepayment rate across all issuer types was 6.2 in May, versus 5.1 in April. For May 2022, the CPR was 9.9.

"However, prepayments still remain very low, and we expect speeds to remain low for the foreseeable future as purchase activity remains subdued and the majority of the mortgage market is still 300 basis points out of the money to refinance," Bose George, a KBW analyst, wrote.

The latest Mortgage Bankers Association Weekly Application Survey put the 30-year conforming mortgage at 6.81%, the jumbo at 6.74% and loans insured by the Federal Housing Administration with an average rate of 6.73%. Those rates are keeping many existing homeowners from seeking a new residence as well as from refinancing.

A year ago, the conforming 30-year FRM averaged 5.4% but in 2021, it was 3.15%. "It would take a significant decline in rates (which we do not expect) for transaction volumes to increase meaningfully" for mortgage originators," George said.

George estimated just 1% of the market is in the money to refi. If rates were to fall 300 basis points, it would make financial sense for 28% of current borrowers to refinance. At a 200 basis point decline that shrinks to 12% and at 100 basis points, just 4% would be in the money.

KBW remains positive on the six mortgage insurers "given that we expect credit to hold up better than current valuations (near/below book value) suggest," George said. "While we are neutral on most mortgage originators, gain-on-sale margins appear to have bottomed, so we are becoming more constructive."

The CPR for Fannie Mae bonds in May was 6.3, versus 5.2 in April and 9.8 one year ago. When it comes to Freddie Mac, the CPR last month was 6.1, compared with 5.0 in April and 9.3 for May 2022.

Over the same time frame, the Ginnie Mae CPR of 7.7 was up from 6.4 but down from 14.2.