Mortgage Strategy Monthly Report


Walt Schmidt, Alexis Vilimas, and Brandon Messing
Prepare for the Taper “Fuss”

The most common investor inquiry lately has been some form of: best MBS strategies for a potential taper. We tackle this issue in the current article. There is some irony attached to both this inquiry and response as the yield on the 10yr UST Note seems unable to escape the 1.20-handle to the upside for any extended period. But the Fed does need to taper and – likely much later - raise rates at some point, right?.

Effect of Cash-Out Refi’s
Despite the sharp decline in overall refinancing over the past three months, cashout refinancing activity has remained strong. YieldBook expects “very strong cash-out refinancing” and made specific adjustments to account for the buildup of HPA in the next model release, scheduled for later this month. The following analysis will review the recent uptick in cash-out issuance and discuss the potential implications on conventional MBS prepayments

Market Update

Month-to-date, the 30yr production coupons have underperformed their swap and treasury hedges. CMO spreads were flat thus far in August. Payups for loan balance specified pools were mostly tighter. Overall prepayment speeds decreased in July by 8.0%. The decreases are due to slightly higher rates during the refinance window and one less settlement day during the month. 30yr conventional was slower by 9.0%, 20yr conventional was slower by 8.8% and 15yr conventional was slower by 7.5%. Speeds for the Ginnie Mae sector decreased by 5.9%.

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