MBS Turnover Speeds Are Not Created Equal
January 21, 2025
Almost 99% of mortgages are non-refinanceable at current mortgage rates (see Fig. 1). Are all OTM (out-of-the-money) loans prepaying in the same way, and is collateral selection truly unimportant? The data-driven analysis below demonstrates that even within a large pool, it is possible to select collateral with preferential characteristics and achieve up to a 5 CPR pickup in speeds.
Although prepayment analysis is less critical in the current environment, where most MBS collateral is OTM, it is still possible to identify collateral with advantageous characteristics. Our loan-level econometric analysis indicates that the following prepayment drivers are the most significant:
- Incentive (see Figs. 2-4)
- Loan Size (due to curtailments) (see Fig. 2)
- Current LTV (due to cash-out refinancing) (see Fig. 3)
- Credit (FICO or SATO, due to involuntary prepayments) (see Fig. 4)
- Geography
- Loan Purpose
- First-Time Homebuyer Status
- Other Factors: Number of units, credit score, etc.
Of course, conducting a detailed prepayment analysis for each security manually is nearly impossible. To address this challenge, we have automated the process using data-driven analysis without relying on subjective "black box" modeling assumptions. For any security, our system automatically generates a prepayment vector for use in pricing and risk analysis.
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The data and analytics used in the figures below can be accessed by requesting a free trial HERE.
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