Well it is confirmed: the best borrowers get the best rates.  Shocking huh?  Early this evening updated prepayments came out from Fannie Mae, and the results were less than shocking.  While it may be unintuitive to some, the reality is that borrowers with the HIGHEST rates are prepaying (refinancing) the SLOWEST.

This subject has been beaten to death, but today’s prepays confirm the expected.  A vast majority of homeowners are stuck in above market fixed rate mortgages as they cannot qualify due to lack of equity, lack of liquidity etc.. Today’s view of the Fannie data is our first real look since the 10yr plummeted under 2%.

As shown below, 15yr 3.5% and 4% pools flew, with 3.5% up over 100% month over month, and 4%’s up between 29% and 69%.  You don’t have to be a mortgage expert to see what’s happening here.  The best credits, the ones who refinanced over the last few years at the lowest rates are doing so again, while the same crew who is stuck continues to be.

Less obvious, but still very interesting is whose benefitting from this.  The answer? Generally it’s pension funds, mutual funds, and money managers.  These type of institutions, among others, have reaped the benefit of “up in coupon” premium mortgages having this huge “carry”.   Unless some sort of government and/or GSE intervention occurs, expect this type of activity to continue.

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