Dr. Healy's Monthly Prepayment Observations: The Great Mortgage Standoff

Each month, our industry expert Dr. Thomas J. Healy reviews mortgage prepayment activity and the forces shaping borrower behavior. His latest observations point to a market caught between economic uncertainty and growing demographic pressures, creating continued volatility across mortgage portfolios. 

Speeds were down a bit this month for both conventionals and governments. Interestingly, the lower coupons showed a bit of an increase, while the higher coupons experienced material drops. The overall theme for the month remains volatility. The Iranian War/cease fire, gas prices, China/Taiwan, tariffs, Russia/Ukraine are all contributing to a great uncertainty as to what is coming next. Mortgage rates were up slightly from April 30st. Inflation continues to be high, but we have a new Fed chairman who is supposed to lower rates. It's a crap shoot where rates are going.

The average coupon of all loans outstanding in this database ($5.8T) is 4.34% 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. 1/6 of the outstanding loans are now close to or "in the money" (i.e. >= 6.0%)
4. Rates have increased 10 bps in the last month. It is unclear where they are going from here.

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