Sharp Credit – Credit News – Credit Information
The November Mortgage
Monitor from Black Knight focused largely on the shifting of the mortgage
market toward purchase originations and the unexpected expansion of the
refinancing pool due to recent interest rate drops, but it also had an
interesting analysis of the current mortgage prepayment rate (also known as single
month mortality or SSM). Mortgage
prepayments typically slide along with refinancing, and right on schedule the
SSM rate for fixed-rate mortgages hit a 10-year low in November, down 34
percent year-over-year. But this time there
are some anomalies in the decline.
First, it is concentrated in fixed-rate mortgages. Prepayments of older adjustable rate mortgages
(ARMs), those in the 2004-2007 vintages, are up 3 percent on an annual basis,
because short term interest rates are rising, driving up rates on those ARMs
due for adjustment. This has increased
both refinancing pressure and housing turnover among affected homeowners. For similar reasons, prepayment speeds among
legacy private labeled securities (PLS) have also been strong, running more
than 50 percent above the market average in November and higher than conforming,
FHA, VA, and portfolio loans in each of the past 23 months.
Prepayments are primarily driven by home sales,
refinancing, and mortgage defaults. Some homeowners also make larger than
required payments on principal to hasten amortization, but these are not
included in the Monitor analysis. As might be expected, prepayments by way of
refinancing, whether rate/term or cash out, have declined. Rate/term refinancing accounted for only 6
basis points (bps) of SMM in September, the lowest single-month volume since
Black Knight began tracking it in 2005, and down more than 90 percent in less
than two years. Cash-out driven prepays
are down by 30 percent in each of the past three months, accounting for only 17
bps of the total.
But the housing turnover driver has also shrunk. While
still accounting for more than half of all prepayment activity, the annual rate
of turnover has fallen by an average of 3 percent over the past six months and
September’s rate was more than 10 percent lower year-over-year. Black Knight says this may be due to an
unusually high number of mortgage holders, who should be in their peak selling
years, staying put due to rising home prices and mortgage rates.
Another change is in the prepayments accounted for by
various credit score buckets. Borrowers with higher scores (720+) have led the
market in their rate of prepayments for each of the last four years. Black Knight points out elsewhere in the Monitor that higher credit score
borrowers are usually the quickest to refinance when rates move lower and the earliest
to abandon refinancing as rates rise. That appears to be the case here as the
high score group has now had the lowest rate of SSM for ten of the last 12
months, declining by 58 percent from two years ago while the rate is down only
14 percent among those with the lowest credit scores.
Those borrowers trail the rest of the market in both
types of refi. Rate/term refinances among
this cohort were once more than 40 percent above the market average but have
fallen below it in six of the last seven months. They are also refinancing to
pull out cash less per capita despite holding the majority of tappable equity
(equity above 20 percent). The high
score cohort has trailed the market in cash-out refinancing for the last 16
The high score group has lost its dominance with the
other prepay drivers as well. It has gone
from leading the market average for housing turnover by more than 10 percent 18
months ago to just over a 1 percent edge in the third quarter of this
year. As might be expected, their prepayments
due to default are usually lower than the market average, but have now fallen
to 0.01 percent, the lowest since 2006.
This cause has also fallen among the other credit buckets, further increasing
the SSM deficit.
Black Knight concludes that these among credit score
buckets can be attributed to the rising rate environment, but it is also worth
a closer look at how prepay drivers have changed overall.