Mortgage investors dodged a possible wave of prepayments thanks to low loan balance specified pools, according to a recent Bloomberg article.
Since the end of March, the Mortgage Bankers Association’s US Refinancing Index saw the 11-basis-point increase in mortgage rates drop about 28% in three weeks. This marked the index’s sharpest aggregate decline over the same time period since February 2015.
Investors have bid up specified pools and received fixed payments to brace themselves for a surge of refinancings when the 30-year mortgages rates fell to 4.06% in March from 4.49% in November.
The MBA gauge, a measure of refinancing applications, increased significantly during that span, reaching its highest level since 2016. According to Bloomberg, prepayments could affect investors who paid more than 100 cents on the dollar for mortgage bonds as their principal comes early and at par.
Investors bought low loan balance specified pools in search of ways to reduce risks and avoid refinancing red flags such as high credit scores and big loans, according to Bloomberg.
Bloomberg’s data correlated the low loan balance specified pools at the end of March with relatively slower prepayments.
Nearly $400 billion in mortgages already lack enough incentive to refinance due to the hike in rates, according to Scott Buchta, head of fixed-income strategy at Brean Capital.
“At this point, we expect prepayment speeds in conventionals to peak in May and begin slowing down precipitously in June, especially in the cuspy 4 and 4.5 percent coupons,” Buchta wrote in a note to clients.