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“Therefore, based on our analysis, we expect rising interest rates to cause a disproportionately greater reduction in prepayments for post-crisis originations that have a higher concentration of low interest rate, low LTV mortgages.” “By our estimate, the concentration of this rate-sensitive borrower is 2.5 times higher in the post-crisis transactions,” the report states. Morningstar’s report states that it expects that mortgages with LTV ratios below 60% and interest rates under 6% will see the biggest drop in prepayments. And as refinances drop, so do prepayments. For example, if the market interest rate is 4.19%, as it is now, a borrower with an interest rate of 3.75% has no incentive to refinance. As interest rates rise, borrowers lose the incentive to refinance. Rising interest rates could potentially cut prepayments to a fraction of the current levels and increase default risk in RMBS transactions.”Īs Morningstar notes, prepayments are driven by interest rates. “Rapid prepayments have accelerated the payments to bondholders, reducing bond duration. “Prepayments in post-crisis jumbo transactions have been over 20% within the first 12 months of loan origination,” the analysts add. “Tighter mortgage underwriting, low loan-to-value requirements, and 100% due diligence in post-crisis jumbo residential mortgage-backed security transactions have limited defaults to only a handful of loans over the past seven years,” the report continues. interest-rate environment of recent years, the rapid pace of prepayments arguably has played a role in containing defaults,” Morningstar’s analysts write. Overall, as shown in Freddie Mac’s report, interest rates have been on the rise since the election, buffeted by the December announcement from the Federal Open Market Committee that it planned to increase the federal funds rate for the first time in a year.Ī recent report from Black Knight Financial Services showed the impact of rising interest rates on borrowers, with some 5 million borrowers losing the incentive to refinance as interest rates rose.īut what will the impact of rising interest rates be on mortgage-backed securities, especially private-label mortgages?Ī new report from Morningstar suggests that between the Fed’s decision to raise rates and the indication that more rate increases are to come, prepayments will fall throughout 2017.īut as prepayments slow, default risk will increase, the report shows. 26, 2017, up from 4.09% in the previous week.
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The latest data from Freddie Mac, released Thursday, showed that mortgage interest rates are on the rise again.Īccording to Freddie Mac’s latest report, the 30-year fixed-rate mortgage increased to 4.19% for the week ending Jan.