Prepay Speeds Spike—But for How Long?

Market volatility is back in focus—and it’s already impacting borrower behavior.

In this month’s prepayment update, industry expert Dr. Thomas Healy unpacks the key drivers behind rising speeds, from geopolitical shocks to shifting borrower sentiment—and what it could mean for what’s next.

OBSERVATION: Speeds were up pretty much across the board this month. The Iranian War started on February 28th, resulting in an immediate flight to the safety of US Treasuries. This, in concert with previous low-rate mortgagor locks, prompted an increase in prepay speeds. This lowering of interest rates, however, did not last long. As it became apparent that the war would be inflationary, rates started to climb with a vengeance by mid-month. While speeds are up in March, I expect them to fall significantly in April.

The average coupon of all loans outstanding in this database (S5.8T) is 4.31%, and 79% of all mortgages have coupons under 6.00%.

However, four dynamics have appeared:

1. Some borrowers are tiring of hanging on to their low-rate mortgages and succumbing to demographic pressures (new home, job transfer, etc) to refi
2. Cash-out refis seem to be growing in popularity with approximately 12% of all new loans falling into this category
3. 1/6th of the outstanding loans are now close to or "in the money" (i.e. >= 6.0%)
4. Rates have increased 50 bps in the last month. It is unclear where they are going from here.

Shifting rates. Evolving borrower behavior. Uncertain direction.

In this environment, understanding prepayment risk isn’t optional; it’s critical.

Level1Analytics gives you real-time visibility into prepay trends, scenario modeling, and portfolio impact, so you can stay ahead, not react behind.

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