Since 1857, Cline Williams has devoted attention to the unique needs of the banking and nancial services industries. Since then, we have provided our clients with the resources they need in the areas that are most important to them – from lending and collections, to regulatory compliance, to mergers and acquisitions, and so much more. We’re more than a law rm. We’re a partner for your bank. LINCOLN I OMAHA I AURORA I FORT COLLINS I HOLYOKE Andrea F. Pringle is a Financial Strategist and MBS Analyst at The Baker Group. She began her career in Washington, DC, where she also earned her MBA from George Washington University. Andrea worked on the Capital Markets Sales and Trading Desk at Fannie Mae for five years before returning to Oklahoma to work in corporate finance. Andrea joined The Baker Group in 2020, and her work focuses on mortgage products. Contact her at 800-937-2257 or apringle@GoBaker.com. the more economic benefit a borrower realizes by refinancing when rates are low and the more economic burden a borrower endures to refinance or move when rates are high. That means these loans have a tendency to perform the exact opposite way an investor hopes by prepaying fast when rates are low and extending when rates are high. By increasing the average loan size in the TBA market, the collateral skews a bit less desirable and pricing adjusts to reflect that. Home price appreciation also organically pushes up the average loan size of new MBS. Analysts estimate home prices to appreciate around 5% to 7% in 2022 after increasing nearly 20% in 2021. Additionally, with higher rates, supply will increasingly be comprised of purchase loans and fewer refi loans. Purchase loans tend to have larger loan sizes, especially when home prices are on the rise. Further, the refi loans made in this environment will also shift from primarily “rate and term” refinances, which characterize lowrate environments, towards cash-out refinances. Cash-out refis tend to have larger loan sizes because borrowers take cash out of the equity in their homes by increasing the size of their mortgage. Prepayments What these dynamics mean for prepayments may seem straightforward on the surface in that higher rates and higher loan sizes slow speeds as borrowers are less incentivized to refinance ... but by how much? With rate and term refis down, turnover and cash-out refis become an increasingly important part of the picture, and both are buoyed by strong HPA. However, record low housing inventory creates a challenge for turnover activity. Excess mortgage industry capacity following the hiring surge in 2020 and 2021 may also incentivize mortgage lenders to target previously untapped borrowers for refis in effort to keep business elevated. All these dynamics create some uncertainty for the mortgage market. One certainty is that these factors will not impact the entire market the same way. Some sectors will feel certain headwinds more directly than others but that should not deter investment in MBS. Investors should simply be strategic about where to direct investment dollars and consider specified pools over TBA. MBS Themes — continued from page 23 NEBANKERS.ORG 24
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