The rise and fall of Ginnie Mae servicer speeds
admin | September 21, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Speeds in two large Ginnie Mae servicers have taken a different path over the last few months. Ginnie Mae has successfully controlled Freedom Mortgage’s VA speeds, which have fallen close the cohort pace over the last three months. But Quicken’s prepayment speeds have picked up relative to their peers. Even their 30-year 3.0% pools are prepaying faster. Freedom’s premium custom pools consequently could be a buy, along with Quicken’s discounts.
Freedom VA speeds slow to cohort levels
Freedom Mortgage’s VA speeds have improved dramatically this year. For VA loans with greater than $200,000 loan size, Freedom loans prepaid 6.4% faster than their peers over the last three months. This is a substantial improvement from the prior 12 months, over which Freedom loans prepaid 38.5% faster than their peers.
Exhibit 1 shows the difference for 4.0% coupon pools with loans originated in 2017 and 2018. The 2017 vintage loans have slowed considerably throughout the year and almost converged to cohort levels in June. The 2018 vintage has been consistently prepaying at (very slow) cohort levels.
Exhibit 1: Freedom VA prepayment speeds, 4.0% coupon
Source: Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities
Exhibit 2 (below) shows similar results for 4.5% pools. The 2017 vintage Freedom loans have prepaid only slightly faster than the cohort since May, and the 2018 vintage has been prepaying at cohort levels throughout the year.
Exhibit 2: Freedom VA prepayment speeds, 4.5% coupon
Source: Ginnie Mae, eMBS, 1010data, Amherst PIerpont Securities
Ginnie Mae and Congress have undertaken efforts to control VA prepayment speeds. These include benefit tests that must be passed in order to do a refinance, minimum seasoning requirements before a loan can be refinanced, and restricting three servicers, including Freedom, to only custom pool execution.
Custom pools are not TBA-deliverable and can trade behind TBA levels. A new Freedom custom 30-year 4.0% pools likely trades 30/32s or more back to TBA, with new 4.5% pools likely $1-10 or more back. Therefore Freedom VA customs may present a relative value opportunity vs. TBA—similar speeds at a lower price. Freedom low loan balance VA pools could also be a good value while also offering call protection to investors concerned that Freedom’s prepayment behavior will deteriorate in a rally.
Quicken pools prepay faster across the stack
Quicken’s Ginnie Mae loans have trended faster over the last few months, a concerning trend for investors. This is true of both their FHA and VA loans. On average Quicken prepaid 57.5% faster than their peers over the prior three months, compared to 40.0% faster over the prior 12 months. The difference is more extreme in their FHA loans, which increased to 90.3% faster from 63.2% faster. Exhibit 3 (below) shows the difference for three 2017-vintage cohorts.
Exhibit 3: Quicked Ginnie Mae prepayment speeds
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Quicken pool speeds, for all three coupons, widened relative to their respective cohorts. The 3.0% Quicken pools jumped during the summer months, while the cohort showed modest increases. Quicken 3.5% pools have been consistently faster, and also exhibited a summer jump that pushed the gap wider. Quicken 4.0% pools slowed, but not nearly as much as the cohort. Therefore the roughly 5 CPR differential in 2017 widened to roughly 10 CPR in 2018.
The discount speeds suggest that lower coupon Quicken pools could offer extension protection. A near-par 3.5% pool might be too risky since those would likely exhibit very fast prepayments in even a modest interest rate rally, but could work well for an investor with a view that rates won’t decrease. Pricing on 3.0%s might be far enough below par to mitigate concerns about call risk.
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