Recent data show a mixed picture in the mortgage and MBS markets. Overall delinquency rates edged down slightly in Q2 to 3.93%, though they remain above post-pandemic lows. The biggest differences emerge between sectors: conventional agency (UMBS) pools continue to show relatively strong performance, while Ginnie Mae (FHA/VA) collateral is under more stress.
FHA borrowers, in particular, are seeing rising early-stage delinquencies, with 10% of loans not current. Serious delinquencies remain lower than expected, but this is partly due to policies that keep delinquent loans in pools longer, masking underlying credit strain.
For investors, this means higher delinquency pipelines could eventually lead to faster prepayments in certain coupons. However, Ginnie Mae collateral poses more risk if home price appreciation slows or rates fall sharply.
On the prepayment side, three trends are shaping the outlook:
- Borrowers with moderate-to-high refinancing incentive will pay down faster.
- Loan closing times are shortening, pulling forward prepayments.
- Cash-out refinancing – especially in low loan balance pools – could pick up thanks to record homeowner equity.
Bloomberg’s latest prepayment models reflect these shifts, projecting slightly faster speeds for high-coupon loans and cash-out heavy pools, which reduces call protection for investors. While only about 5% of borrowers currently have enough incentive to refinance, a rate drop toward 5.5% could spark more meaningful activity.
Market performance in July was generally favorable. Mortgage rates slipped modestly, with the 30-year conforming rate declining ~10bps. Prepayment speeds rose 4% month-over-month, aided by slightly lower rates and a longer business calendar. CMOs and CMBS spreads were largely unchanged.
What this means for credit unions
For originators, slightly lower mortgage rates may create incremental refinance and cash-out activity, especially among higher-coupon borrowers. With more than $12+ trillion of homeowner equity nationally, credit unions should prepare for increased conversations with members about tapping home equity if needed.
On the investment side, credit unions holding MBS should be attentive to sector differences – conventional UMBS continue to perform well, while Ginnie Mae pools carry elevated credit stress that could lead to volatility if economic conditions weaken. Carefully tracking prepayment assumptions and sector exposures will be critical in balancing yield and risk.
Mortgage market expertise
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