Based on rising mortgage rates, a lower day-count and a declining refinance index, June prepayment rates are expected to fall by 10%.
For instance, Freddie Mac’s 30-year survey rate rose by 10 basis points from 3.45% in April to 3.54% in May, which will predominantly affect June prepayments — assuming a shorter one-month lag from application to closing as volumes slow, Royal Bank of Scotland (RBS) said in its latest report.
Meanwhile, day-count will decrease by 9% from 22 to 20 days and seasonality will slightly improve.
“In particular, we expect a a 3 to 4 conditional prepayment rate decline 3.5 coupons to 4 coupons due to higher mortgage rates, but a moderate change in 5 coupons and 6 coupons,” said Sarah Hu and Ashley Gam, agency mortgage-backed securities strategists for RBS.