Refinance demand is down, creating a situation where a more purchase-centric mortgage market could drive a shift in prepayment speeds on agency mortgage securities, analyst Sarah Hu with Royal Bank of Scotland (RBS) concluded Wednesday.
Hu points out in a new research note that refinancing demand is on the decline. Meanwhile, housing turnover – which is usually driven by existing home sales – is set to become a more significant driver of prepayment speeds.
"In particular, if mortgage rates remain at their current levels or continue to increase, the long-term prepayments of 3s and 3.5s are expected to reach a 6-7 conditional prepayment rate, equal to the turnover rate in an environment where the housing recovery is firming up," Hu said.
If housing turnover is the driver of agency prepayments, existing home sales become critical. Still, prepayment speeds are still greatly impacted by mortgage rates and housing affordability levels.
In 2005, the nation recorded 7.1 million existing-home sales before falling to 4 million in 2008. By last year, existing-home sales rose to 4.6 million – a trend that is expected to continue along with the housing recovery, RBS noted.
