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Fewer homeowners are paying off their mortgages early

Residential mortgage prepayment rates slowed in 48 states and the District of Columbia between the 12-month period that ended April 30 and the 12-month period that ended July 31, according to data in reports issued by MountainView Financial Solutions, a Situs company.

The 12-month prepayment rate on all mortgages nationwide fell from 11.2% as of April 30 to 10.8% as of July 31, a decline of 40 basis points. Michigan and Tennessee had the largest slowdown in prepayment speeds, with declines of 70 basis points between the two reporting periods. Kentucky and Mississippi had prepayments slow by 60 basis points, while five states (Alaska, California, Colorado, Nebraska and Oregon) and Washington, DC, had declines of 50 basis points.

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The only two states that didn’t decline between the two reporting periods were North Dakota and Wyoming, where the rates were unchanged.

Nationwide, interest rates and numerous macroeconomic factors determine the pace at which homeowners refinance their mortgages, sell their homes or otherwise pay off their mortgages earlier than the full term of their loans. However, when you look at any specific state or zoom in on one ZIP code, you realize that local economic conditions, unemployment rates, home prices and home sales are driving the prepayment decisions of individual borrowers.

Investors in mortgage servicing rights (MSRs) and whole loans therefore need to carefully monitor and model prepayment speeds at a state or even more micro level, according to Mark Garland, Managing Director of Analytics and head of MSR valuation at MountainView.

“Prepayment speeds are where we spend 75-80% of our time in pricing MSRs – it’s that important,” said Garland in a recent interview about the report. “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.”

MountainView’s latest 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 compared to refinance volumes and home price appreciation levels.