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Prepayment activity to slow in 2023 as mortgage delinquencies face pressure

Prepayment activity hit another bottom in November, which was led by low refi activity and home sales dipping

Prepayment activity is expected to face seasonal headwinds into early 2023 after hitting another record low in November. 

“Record low refinance activity and lackluster home sale volume driven by still historically tight home affordability” was the result of prepayment dropping 15.6% to a single-month mortality rate of 0.40%. This was below the previous record of 0.48%, Andy Walden, VP of enterprise research and strategy at Black Knight, said. 

Home sales tumbled more than 7% in November, marking 10 straight months of decline, according to the National Association of Realtors (NAR). Demand for refi was down a staggering 84.5% from a year ago, Mortgage Bankers Association‘s (MBA) data showed. 

“Prepayment speeds will continue to run into season headwinds over the next two months with housing turnover related prepayments – which now make up a record 60% of all prepayments – typically falling by 25% from November through January,” Walden said. 

Rate lock volume, which acts as a leading indicator for both origination and prepayment activity, also suggested a downward trend. Overall lock volume was down 21.5% in November compared to October — and down another 10-15% lower over the first three weeks of December, despite declines in recent interest rates. 

The national delinquency rate rose another 3.5% in November to 3.01%, up 10 basis points from October. An increase in 30-day delinquencies, which jumped by 31,000 cases, and a rise in 60-day delinquencies, which escalated by 25,000, led the climb. 

Improvement among seriously past-due loans by 90 or more days continued to stagnate, with the population of 90-day delinquencies ticking down -0.2% from the month prior. 

Despite trending higher in recent months, the national delinquency rate of 3.01% in November is still more than a half-percent below its pre-pandemic level of 3.53% in November 2019.

“Mortgage delinquencies, which still remain historically low, have begun facing upward pressure from a number of factors including seasonal trends, the recent hurricane in Florida, shifting credit quality due to rising rates and tightening affordability, and broader macro-economic pressures,” Walden said. 

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