DENVER–Residential mortgage prepayment rates dropped in 48 states and the District of Columbia between the 12-month period that ended July 31 and the 12-month period that ended Oct. 31, according to newly released data.
In addition, nationwide, the average 12-month prepayment rate fell from 10.8% to 10.2% – a decline of 60 basis points (bps) – between the ends of the two periods.
Those finds were released as part of an analysis of mortgage prepayment reports issued by MountainView Financial Solutions, a Situs company. MountainView collects historical prepayment data for its valuation and risk-management work on residential mortgage servicing rights (MSRs), whole loans and mortgage-backed securities (MBS).
The analysis found California and Utah experienced the largest drop in prepayment rates (100 bps each) between the two reporting periods, while Colorado and Washington closely followed with declines of 90 bps. At the other end of the range of changes, North Carolina and West Virginia were the two states with rate increases, at 10 and 40 bps, respectively, the company said.
“Nationwide, interest rates and numerous macroeconomic factors determine the pace at which homeowners refinance their mortgages, sell their homes or otherwise pay off their mortgages earlier than the full term of their loans,” the report states. “However, when looking at any specific state or zooming in on one ZIP code, analysts conclude that local economic conditions, unemployment rates, home prices and home sales drive the prepayment decisions of individual borrowers.”
A Key Metric
Prepayment rate, or speed, is a key metric used in analyzing the expected life of a residential mortgage asset, according to MountainView Financial Solutions. Expected life then becomes a key modeling assumption used in determining the fair value of the asset, it added.
“Prepayment speeds are where we spend 75-80% of our time in pricing MSRs – it’s that important,” said Mark Garland, managing director and head of MSR valuation at MountainView, in a statement. “Servicing is an elaborate bet on how long a mortgage will live. If you can get speeds right and miss a few of the other data trends, you’ll still be very accurate in determining value. Conversely, if you get all of the other analysis right and you’re off on your prepayment speeds by even a little, your valuation will be blown up.”
In MountainView’s latest report, New York has the slowest 12-month prepayment speed (7.6%) and Idaho has the fastest (13.6%).