It has been a wild ride for the last eight years. Between COVID and Fed’s various quantitative easing programs, prepay speeds have been all over the place (see graph above). I might argue, however, that mortgagor behavior really hasn’t changed much over this period; only the stimuli that incite their behavior has changed. As rates dropped below mortgagors’ actual coupon, they refi’d … as they always have.

The last two months’ increase in speeds, however, is interesting and may indicate a slight change in mortgagors’ behavior. As we gradually migrate back to the more normal pre-COVID prepay regimen, I am seeing two subtle changes:

1. The strong correlation between mortgage rate changes and prepay speeds (see 2025_0213 blog) seems to have weakened. Rates have increased a bit over the last two months, yet prepays continued to rise. I believe this is attributable to borrower “fatigue” and pent-up demand. Borrowers have been waiting for the return of the 3% mortgage to buy that larger house, relocate to a new job opportunity, move close to their family, but are starting to realize that is not coming. Accordingly, they are reluctantly getting back into the market. This nascent trend is being exacerbated by many borrowers grabbing at the opportunity to get cash out of their inflated home values, before they fall.
2. Borrowers’ urgency to refi seems to be slowing as well. Traditionally, borrowers do not pay-off their loans in the early months of that loan’s age (i.e. the PSA Curve). That disappeared through the COVID years, when early prepays soared. This trend appears to be slowly reversing. The graph to the right shows normalized actual prepays by month of age for all FNMA loans. While the red (Nov 2024) and the blue (Apr 2025) line average to the same lifetime prepay speed, it is obvious that pay-offs have been extended somewhat into the future. Since servicing cash flows are heavily skewed to the earlier years of life of a portfolio, this tends to work in the servicer’s favor.

Understanding the differences between probable-prepay-behavior and market-expected-prepay behavior allows for making better buy/sell/hold decisions. Let Level1Analytics perform a prepay propensity study on your portfolio. Why guess, when you can know: Stay ahead with the data, clarity, and support your bank needs every month.