Mortgage Prepayments Hit New Lows as High Rates Keep Homeowners Locked In

Mortgage prepayment speeds slowed significantly in January, with Fannie Mae’s 30-year mortgage-backed securities seeing a 14 percent drop from the previous month. This means fewer homeowners are refinancing or paying off their mortgages early, bringing prepayment activity to its lowest level since March. Over the past year, prepayment speeds have been sluggish, averaging just 6.1 percent on a one-month constant prepayment rate (CPR) basis, and the market remains stuck at these historically low levels.

The main drivers of refinancing right now, often called the "Three Ds" (death, divorce, and default), highlight just how little movement there is outside of necessity-driven transactions. Mortgage rates barely changed in January, finishing the month at 6.84 percent, which has kept most homeowners from refinancing since they are locked into lower rates from previous years. The slowdown was most pronounced in the lower-rate mortgages, which were already seeing very little activity, while the highest-rate loans saw slightly faster prepayment speeds due to some borrowers still having a financial incentive to refinance.

Looking ahead, the refinancing outlook remains bleak. As of the end of January, only about 3.5 percent of homeowners with agency-backed mortgages have an incentive to refinance, meaning they could lower their current rate by at least 0.50 percent. That is a sharp decline from the 9 to 10 percent who had such an opportunity back in August and September. With mortgage rates still hovering near 7 percent, the vast majority of borrowers remain “out of the money” when it comes to refinancing.

February's prepayment report will likely show another decline in activity due to fewer business days in the month, but a seasonal uptick could begin in March, when prepayments historically pick up. Until then, prepayment activity will remain slow, with any excitement concentrated in higher-rate loans where refinancing still makes sense.