Prepayments Speeding Up? Not So Fast.

There have been rumors recently that mortgage prepayments are picking up, which would have a major impact on the values of Principal Only (PO) and Interest Only (IO) mortgage-backed bonds. I've heard CPRs in the high double digit, close to 100.

Maybe. But high CPRs do not necessarily mean sustainable prepayment speeds, nor a statistically significant phenomenon. The reason is, some MBS with current high CPRs have few loans as collateral, and just one or two mortgages prepaying in the same month will cause the (annualized) CPR to soar.

For example, the Citigroup Mortgage Loan Trust PO below had, as of June 09 (header of the third column) just 17 loans outstanding (2nd row). The (again, annualized) CPR of 100 that month (3rd row from bottom) can be explained by few simultaneous refis.


(Click to enlarge)

Likewise, Wells Fargo MBS 2005-9 2APO, another PO, has just 20 loans as collateral. Its CPR has been flat at 0.00, until last month when it reached 72.10 -- which, again, can be explained by just a few refinancings out of the 20 mortgages.

But nothing yet looking like a widespread trend.