Agency Prepayment Commentary — September 2025
Market Context: - Mortgage rates elevated, refi incentive muted for low coupons (2020–21). - Mid/high
coupons (2018–2019, some 2022) show faster CPR due to higher incentive and less burnout. - GNMA
runs hotter than GSEs (streamline refis, borrower mix). - Seasoning (WALA) and vintage effects critical
in enriched model.
Top Buy Candidates (slower-than-model):
| Program | Coupon | Actual CPR | Model CPR | ∆ (Act-Mod) |
|---|
| Ginnie Mae II (G2) | 1.50 | 5.6 | 8.3 | -2.7 |
| Ginnie Mae II (G2) | 2.00 | 6.8 | 8.7 | -2.0 |
| Ginnie Mae II (G2) | 3.50 | 7.4 | 9.3 | -1.9 |
| Freddie Mac (FH) | 3.00 | 6.9 | 8.8 | -1.9 |
| Freddie Mac (FH) | 3.50 | 7.4 | 9.1 | -1.8 |
Top Sell Candidates (faster-than-model):
| Program | Coupon | Actual CPR | Model CPR | ∆ (Act-Mod) |
|---|
| Ginnie Mae II (G2) | 8.00 | 32.8 | 7.9 | 24.9 |
| Ginnie Mae II (G2) | 7.50 | 26.7 | 7.3 | 19.4 |
| Fannie Mae (FN) | 7.50 | 29.0 | 9.9 | 19.1 |
| Ginnie Mae II (G2) | 7.00 | 25.5 | 7.8 | 17.8 |
| Ginnie Mae II (G2) | 6.50 | 20.6 | 7.6 | 13.1 |
Model & Methodology: - Logistic S-curve enriched with seasoning (WALA), burnout
(Incentive×WALA), and vintage buckets. - Converted CPR into PSA equivalents to normalize for age. -
Buy signal = Actual CPR slower than model (extension protection); Sell = faster than model (prepay
drag). - Price-based calls require TBA stack; signals here are relative-value only.
Scatter CPR → cohorts above the line are "faster than model" (Sell), below the line are "slower" (Buy).
Given
This import collapse is recessionary in signal.
Likely downward pressure on rates → MBS price appreciation in near term.
Prepayment risk may rise modestly (especially in higher-coupon pools) if rates fall, but the bigger driver is spread tightening from lower rate expectations.
Buyer's Market Signs
Lower prepayment speeds make MBS cash flows more stable → better yield predictability for buyers.
Wider spreads between MBS yields and Treasuries due to policy uncertainty → buyers can lock in attractive yields.
Sellers may have to offer price concessions because fewer investors want to take on mortgage credit and duration risk in a high-rate environment.
Here's the CPR (Conditional Prepayment Rate) probability curve mapping:
Blue (Before CPI Imputation Spike): Higher prepayment expectations due to greater probability of rate cuts and refinancing activity.
Red (After Spike): Lower prepayment expectations because Fed rate cuts are less likely in the short term, keeping mortgage rates elevated.
Gray Shaded Area: The reduction in prepayment risk — this stability in cash flows benefits MBS buyers, reinforcing a buyer’s market environment.
This favors a short-term BUY stance for MBS, especially in lower-coupon or new-production pools where convexity risk is lower.
Here's the updated chart with a third "Post-Rate-Cut Scenario" curve (green dot-dash).
The green shaded area shows the rebound in prepayment risk if the Fed cuts rates, relative to the post-CPI baseline.
This curve sits midway between the red dashed line (low CPR after CPI spike) and the blue line (high CPR before CPI spike), reflecting a partial re-acceleration of refinancing activity.
Left (5.5% Premium): CPR is very sensitive to CPI housing shocks. A ±1% housing swing (≈ ±35 bps Δ) shifts prepayment speeds materially.
Premium TBAs = CPI-linked convexity risk. Investors must manage hedge/carry around Fed/CPI surprises.
Right (3.5% Discount): CPR is flat/insensitive; discount pools remain stable regardless of CPI-driven rate changes.
Discount TBAs = safe harbor. Stable CPR even under housing CPI volatility → useful for portfolios seeking duration stability.
