Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

DRIVERS OF PREPAYMENT ACTIVITY

As noted previously, the two key drivers of prepayment activity are turnover and refinancing. We discuss each next.

Turnover

As previously described, turnover refers to activity where the underlying property is sold or liquidated, and the proceeds of the sale are subsequently passed through to the holder of the mortgage (either outright or as part of a mortgage-backed security) as a prepayment. Casual observers of prepayment speeds will note that speeds for out-of-the-money MBS have, since roughly 2002, been faster than historical norms. Much, but not all, of this increase can be attributed to faster turnover. There is no doubt that speeds on discount securities and loans have been faster since the beginning of 2002 than during earlier periods. However, only part of this evolution can be attributed to turnover in its true economic sense, even though turnover rates have certainly increased in the ten-year period after 1996.

A truer estimate of housing turnover can be created by calculating existing home sales for single-family homes as a percentage of the number of such homes owned. Existing home sales data are published monthly by the National Association of Realtors, while the number of single-family homes outstanding is published by the Census Bureau on a quarterly basis, subject to periodic adjustments. Exhibit 4.2 shows housing turnover over time, calculated by dividing existing home sales into the total number of single-family homes. ...