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.

TOPICS: MBS and residential mortgage loans, futures and forward contracts