Moody's: Global mortgage constant prepayment rates will remain steady

Constant prepayment rates (CPRs) will remain steady in residential mortgage-backed securities (RMBS) globally for several region-specific reasons, supporting ongoing stable collateral performance in RMBS throughout the world, says Moody's Investors Service in a new report published today. CPRs serve as a measure of voluntary prepayment activity in RMBS and hence of the degree of related prepayment risk in these transactions.

To facilitate cross-jurisdictional comparisons of RMBS metrics, such as CPRs, we use our Global RMBS Market Comparison Tool, which allows for a comprehensive comparison of 13 RMBS markets and provides metrics on the collateral characteristics.

"In the UK, the number of homeowners taking out new mortgages or refinancing existing mortgages will likely rise in 2016, nudging CPRs gradually upward. In the euro area and the UK, a number of seasoned borrowers hold mortgages with interest rates that are lower than currently available in the market, and these borrowers will be unlikely to refinance," says Annabel Schaafsma, a Moody's Managing Director -- Structured Finance and co-author of the report.

Moody's says future prepayment rates in the UK will depend on the timing of interest-rate increases and the extent to which lenders increase their standard variable rates; the effect on individual trusts depends on whether product switches require to be repurchased. Non-conforming and interest only borrowers will benefit as non-bank lenders (or "challenger banks") increase their appetite for these mortgage types.

Moody's research says CPRs will mostly stay flat in continental Europe, as competition among lenders is increasing.

"In European RMBS, CPRs will increase slowly for most countries in the continent over the next two to three years, as competition for borrowers increases among lenders owing to improving macroeconomic conditions in the euro area," observes Mrs. Schaafsma.

Moody's says that Dutch CPRs will modestly increase from a low base, mainly following increased competition among lenders and activity in the Dutch housing market. Prepayments may increase going forward as mortgage interest rates continue to fall.

In Spain and Italy, the rating agency expects CPRs to increase slightly, as increased competition between banks and a decrease in mortgage spreads in both countries will make it more appealing for borrowers to re-negotiate their mortgages. In Spain, low interest rates, very high unemployment and very low job stability do not incentivise borrowers to repay their mortgages.

In the US, because many borrowers have already refinanced at attractive rates, CPRs in US private-label RMBS will remain steady for the rest of 2015. Prepayments in US RMBS will slow later this year when the Federal Reserve raises the benchmark Fed Funds rate and long-term interest rates climb, making refinancing options less attractive to borrowers.

CPRs in Japanese RMBS will stay at their current level, and the Bank of Japan's quantitative easing measures will keep interest rates low. In Australia, the macro-prudential focus on banks' underwriting criteria will reduce the amount of activity in the market, leading to lower CPRs in Australian RMBS.