Predicting Agency Prepayments in the Current Market Environment: Why Yesterday’s Predictive Models Won’t Hold Water Today

Abstract

With mortgage rates near all-time lows, refinancing activity in agency-backed loans is driven almost entirely by credit and equity considerations. Formerly important drivers of refinancing such as incentive and burnout continue to play a role but fail to capture recent behavior unless updated with the “lock-out” effects of loan-to-value ratio (LTV) and credit. In addition, the contribution of defaults to agency pool prepayments is no longer insignificant for most pools and is dominant for certain vintages and coupons.