Prepay Patterns & MSR Signals - What the Data Reveals

As we move into the summer months, recent data reveals a shifting mortgage landscape shaped by evolving borrower behavior and valuation sensitivity.

Conventional speeds continue to bounce around their demographic lows while governments and large balance loans spiked. The average coupon of all loans outstanding in this database ($5.7T) is 4.11%, and 84% of all mortgages have coupons under 6.00%. However, three dynamics are beginning to appear. (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 the product of choice; and (3) 16% of the outstanding loans are now close to or “in the money”.

While borrower dynamics continue to drive prepayment activity, the MSR market is reacting to broader rate stability and a more nuanced risk environment.

MSR values on new loans have stabilized.  Mortgage rates appear to be fluctuating within a general range of 6.75 to 7.00 (CF30), and as a result, prepays have stabilized.  However, a sensitivity issue remains.  As rates increased to today’s levels, there is a recognition that there is more room for them to drop.  The downside risk when market rates are 3.50% is negligible.  That is not the case when rates hover a bit under 7.0%.  This riskiness has to be factored into the valuation.

Together, these trends underscore the importance of responsive, data-driven valuation strategies as market conditions grow increasingly complex. That’s where Level1Analytics comes in. With expert support, proven valuation models, and industry-leading turnaround times, we help institutions stay ahead, no matter how the market shifts. Let’s talk about how we can support your team.