Register here for this month’s call: Thursday, January 22nd, 2026, 1 p.m. ET.
Just before the holidays, RiskSpan’s quantitative modeling team hosted its December Models & Markets call, offering its monthly, detailed look at prepayment model performance, evolving macroeconomic conditions, and what to expect in 2026. Led by Shane Lee and Divas Sanwal, the discussion highlighted a housing and credit market navigating elevated rates, slowing growth, and increasing consumer stress.
Here’s a quick recap in case you missed it.
(Click here for the entire 24-minute recording or continue reading for a summary.)
Why Rate Cuts Aren’t Lowering Mortgage Rates
Although the Federal Reserve delivered multiple rate cuts toward the end of 2025, the Fed Funds rate remains in the 350–375 basis point range, with futures markets expecting only gradual additional cuts in 2026. As the following charts and tables illustrate, even a move toward 300–325 bps next year leaves policy rates well above pre-pandemic norms.
More importantly for housing, longer-term rates continue to dominate mortgage pricing. Market consensus forecasts presented on the slides show the 10-year Treasury remaining above 4% for the next two to three years, a view that has remained remarkably stable across forecasting sources. As a result, mortgage rates have been largely unchanged over recent months despite easing monetary policy.
The implication is clear: refinance and cash-out activity remain extremely constrained and are likely to stay that way well into 2026. Any incremental increase in prepayment activity will come principally from turnover, not rate-driven refinancing.
Home Prices: Growth Slows, Regional Divergence Emerges
We used unadjusted Case-Shiller and FHFA data to highlight that month-over-month home prices declined across many large metro areas, even where seasonally adjusted figures appear more stable. Seasonal patterns have shifted materially in recent years, making unadjusted trends especially informative.
The FHFA four-quarter appreciation map illustrated this growing regional dispersion. Parts of the Sun Belt, including California, Texas, and Florida, have experienced notable price declines, with the Fort Myers area standing out as a recent weak spot. At the same time, select Northeast markets continue to see positive appreciation, with areas near New York showing some of the strongest gains.
Overall, while a broad-based housing downturn has not materialized, slowing appreciation reduces borrowers’ financial flexibility and reinforces the current lock-in environment.
Consumers Under Pressure
As has been a recurring theme in several of our recent monthly calls, the consumer credit environment is showing increasing signs of strain.
Unemployment has edged higher, reaching 4.6% in November, with younger workers (ages 16–25) experiencing disproportionately higher joblessness. Inflation, while easing slightly, remains stubbornly above target, with recent CPI readings still near 2.7% year over year.
We are also continuing to see historically high levels of consumer debt and a notable slowdown in spending growth. Unlike typical holiday-season patterns, consumer spending has not accelerated meaningfully, suggesting households are becoming more selective and cautious.
One particularly telling trend is the rapid growth of buy now, pay later (BNPL) usage. Increasing reliance on BNPL for essential purchases points to tighter household budgets and reduced financial resilience.
Taken together, these indicators support expectations—also shown in the Fed’s December Summary of Economic Projections—that GDP growth is likely to remain near or below 2% over the next several years, while credit performance warrants close monitoring.
Prepayment Model Performance: Holding Up Across Collateral Types
RiskSpan’s prepayment models continue to perform well across Agency collateral.
For Fannie Mae and Freddie Mac pools with WACs of 5.5% and below, observed turnover speeds declined modestly month over month. As highlighted below, this softness largely reflects seasonal effects and a shorter reporting month. While the model projected slightly higher speeds, overall alignment with observed behavior remained strong.
For higher-coupon GSE collateral (6.0% and above), December marked a normalization following unusually aggressive prepayment speeds observed in the prior month. As shown in the charts, observed speeds moderated, allowing the model to close the gap and better track realized behavior.
A similar pattern emerged in the Ginnie Mae collateral, with both discounted and premium coupon cohorts showing improved alignment between modeled and observed speeds. In particular, the moderation in higher-coupon Ginnie Mae prepayments mirrored trends seen in the GSE universe, underscoring the consistency of borrower behavior across agency channels.
During Q&A, the team also addressed VA loan performance. Internal loan-level analysis suggests VA loans tend to prepay faster than baseline model projections, an area RiskSpan continues to evaluate closely.
Looking Ahead: 2025 in Review and What’s Coming in 2026
In 2025, RiskSpan delivered several major Platform enhancements:
- Prepayment Model v3.7, introducing an out-of-the-money (OTM) slope to better capture turnover lock-in effects
- Prepayment Model v3.8, adding a new ARM sub-model and additional tuning controls
- Prepayment Model v3.11, a fully redeveloped framework for non-QM collateral
- Credit Model v7.0, featuring a full delinquency transition matrix for GSE and Ginnie Mae loans
Looking ahead, we outlined an ambitious 2026 release schedule, including:
- A Non-QM Credit Model v7.1 with full delinquency transitions, expected in the first half of the year
- A broader non-agency credit model later in 2026
- A completely new prepayment framework—currently referred to as Prepayment Model 4.0—built from the ground up
We continue to add additional analytics reports on the Platform. Please visit www.riskspan.com/request-access to request free access.
As always, please feel free to contact us to discuss or learn more.
