It is obvious that prepayment speeds are related to current mortgage rates. The graph shows the actual CPR by month on all FNMA loans nationwide (blue).  The FHLMC PMMS mortgage rate is superimposed (red). The relationship between the two is obvious but somewhat surprising on two counts:

1. The strength of the relationship.  The inverse correlation between the two is 0.82.  For behavioral science, this is a strong relationship.
2. The immediacy of the market's reaction to swings in interest rates.  Rates drop and prepays spike.  We have trained our customers well to refi at the drop of the hat.

While this analysis is a macro-analysis, forecasting prepays in your portfolio requires a micro-approach. As mentioned above, prepay analysis is a behavioral science.  Mortgagors behave for a variety of reasons, some of which can be garnered through the data.  Our analyses, which are updated monthly, show that prepays are influenced by many things including:

• Location – Currently, the fastest prepaying states are in the Midwest. Historically fast-paying states like California and New York, are now among the slowest;
• Credit – The relationship between LTVs/FICos and CPRs is surprisingly weak except for the higher coupon loans, where the lowest LTV loans are prepaying the fastest. 
• Principal balance - There is currently a positive correlation between principal balance and CPRs. There is a stronger economic incentive for both originators and mortgagors to refi a larger balance loan than a smaller one.    
• Purpose - Mods, despite their presumed credit anomalies, now constitute the fastest prepay category with PMMs and cash-out refis coming in a close second. Rate/term refis continue to be slow.
• Property type – Loans secured by Condos are currently prepaying the fastest.
• Occupancy - Speeds on loans by occupancy status have converged. While it is expected that Investor property borrowers would be more sensitive to small changes in mortgage rates, this currently is not the case.
• Origination Channel - CPRs by channel have also converged. When rates drop, broker-originated loans tend to prepay the fastest.
• Age of loan – The data shows that mortgagors are more likely to refinance in the early months of their mortgage than the industry standard PSA curve predicts.  

87% of the $3.4T of outstanding FNMA loans have coupons under 6.0%; 97% are under 7.0%.  The average coupon on all loans is only 4.01%. There is little risk of a major refi boom absent a catastrophic drop in rates. Based on actual performance, however, it does appear that the 13% of loans with coupons over 6.00% are at increasing risk of refinancing.  

Unlock critical insights for your portfolio. Contact us to gain exclusive access to our comprehensive monthly national CPR analysis or request a customized Prepay Propensity report tailored to your bank’s unique needs. Empower your decision-making with data-driven intelligence—reach out now to stay ahead in a competitive market.