OBSERVATION:
Speeds are up slightly this month, which is consistent with the small drop in mortgage rates. Interestingly, speeds dropped for all coupon tranches below 5.0% and increased only for mortgages above 5.0%. This implies a dynamic that has been playing out over the past couple of years.

I reviewed the distribution of mortgages by coupon, comparing today’s distribution with that as of December 31, 2023 (see above). In 2023, approximately one-third of all mortgages carried coupons under 3.00%—a share that has not changed. However, the 3.00–3.99% and 4.00–4.99% tranches jointly lost about 15%, which migrated into the ≥5.00% tranche.

I’ve been advocating over the past several months that low-coupon mortgagors appear to be tiring of holding onto their low-cost mortgages. Many are giving in to demographic pressures—such as growing families, job changes, and other life events—and refinancing into higher-cost loans. This pattern still seems to hold true, except for the significant number of loans with coupons below 3.00%.

These borrowers are holding tightly to their once-in-a-lifetime rates and show little inclination to let go. It will be interesting to see whether this trend continues as (or if?) the Fed continues to lower rates.

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