Geography quiz: where are residential mortgages prepaying the fastest and slowest?

The seven states with the fastest prepayment rates for home mortgages are all in the West – Idaho, Colorado, Arizona, Utah, Washington, Nevada and Oregon. That’s according to a report issued by MountainView Financial Solutions, a Situs company, for the 12-month period ending April 30.

According to MountainView’s report, 11.2% of home mortgages in all states had prepayments during the period. Idaho and Colorado had the fastest speeds, at 14.6% and 14.4% of all mortgages, respectively. Not far behind were Arizona (13.7%), Utah (13.5%), Washington (13.2%), Nevada (13.2%) and Oregon (12.9%).

While interest rates and numerous macroeconomic factors determine the pace at which homeowners nationwide are refinancing or otherwise paying off their mortgages earlier than the full term of their loans, local economic conditions, unemployment rates, home prices and home sales drive the prepayment decisions of individual borrowers.

Watching prepayment speeds at a state or even more micro level is essential to investors in mortgage servicing rights and whole loans. Holders of the assets and prospective buyers use pinpointed prepayment data in their valuation and risk modeling.

“Prepayment speeds are where we spend 75-80% of our time in pricing MSRs – it’s that important,” says Mark Garland, Managing Director of Analytics and head of MSR valuations at MountainView. “Servicing is an elaborate bet on how long a mortgage will live. If you can get speeds right and kind of miss some of the other data trends, you’ll be very accurate in determining value. Conversely, if you get all of the other analysis right and you’re off on your prepayment speeds by even a little, your valuation will be blown up.”

States with the lowest rate of mortgage prepayments are at the other end of the risk spectrum in MountainView’s report. Eastern states had the slowest speeds, led by New York (8.3%), Connecticut (8.6%), Maryland (9.0%), Delaware (9.0%), New Jersey (9.1%), Pennsylvania (9.2%), Virginia (9.6%) and Vermont (9.6%).

Why are eastern states slow? According to Garland, one of the contributors is high taxes, and with the new federal tax rule, there also is a smaller mortgage deduction. In addition, in New York, borrowers pay a 1% tax to refinance their loans.

The booming economy is the other contributor to slower prepayment speeds in eastern states. In areas where housing prices were already high before the housing markets took off, affordability and higher interest rates are starting to hurt the refinance market.

In explaining the fast prepayment speeds out West, Garland says those seven states were very affordable 5-10 years ago, and even with their significant home price appreciation they are still relatively affordable in comparison to other states. He says this means that incentives are still in place to refinance a mortgage or pay it off early through a home sale.

MountainView’s report is available for download. Beyond the ranking of states relative to the average prepayment rate nationwide, the report includes state-specific graphs showing the 15-year trends of prepayment rates in comparison to refinance volumes and home price appreciation levels