Principal prepayments of the US$5 trillion mortgage-backed securities (MBS) rose in August, as mortgage rates declined, according to online data provider eMBS.
The data showed that the 4.5 percent constant prepayment rate that Fannie Mae MBS issued in 2009 and 2010 jumped in August to 18.8 percent and 11.8 percent, up 65 percent and 85 percent, respectively, from July.
As declining mortgage rates attract borrowers to refinance, many mortgage investors have been struggling with estimates in prepayments, which is an early return of principal amount to investors before its maturity period.
Most of MBS prepayments have created losses as the principal was returned to investors at a value price of $100, which is below the bond price in today’s market.
To keep interest rates low, many of the MBS released were purchased by the Federal Reserve in 2009 and 2010 through the central bank’s “quantitative easing” programme.