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Ginnie Mae Puerto Rico pools after the hurricane
admin | January 11, 2019
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. This material does not constitute research.
Ginnie Mae MBS backed by Puerto Rico loans have long been a good source of call protection for investors. Hurricane Maria in September 2017 put this in doubt, since the devastation drove delinquency rates extremely high. However, the delinquency rate in Ginnie Mae MBS has fallen steadily over the last year, leaving little risk of a large spike in prepayments from buyouts. These Ginnie Mae pools appear to be extremely undervalued, trading with pay-ups around 20% of theoretical value. It is possible that the market is still pricing as if Puerto Rico pools have excessive buyout risk.
Delinquency rates have fallen substantially
Delinquency rates in Ginnie Mae Puerto Rico pools are nearly back to the levels pre-hurricane. This means that these pools have little risk of a large jump in buyouts. Exhibit 1 (below) shows the percent of loans at least 90 days delinquent in 2012 and 2013 vintage Puerto Rico pools, before and after Hurricane Maria.
Exhibit 1: >= 90 day delinquency rates have recovered
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
The vertical line marks September 2017, when Hurricane Maria struck. The horizontal line marks the average delinquency rate in 2017 before the hurricane.
Delinquencies peaked at nearly 20% in January 2018, four months after the hurricane. Current delinquency rates are roughly 5%, close to the levels (3% to 4%) observed before the hurricane.
Buyout rates increased modestly
Prepayment rates increased after delinquencies peaked and some loans were bought out. However, there was never a massive jump in prepayments. Pre-hurricane buyout rates were typically around 2 CPR and peaked at 6 CPR in mid-2018. Buyout rates are shown in Exhibit 2:
Exhibit 2: Ginnie Mae buyout rates increased slightly after Hurricane Maria
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
A large jump in buyouts would have been much worse, since no one wants to own the pool (at a premium) in that one month. That risk would hurt liquidity for the pools.
It also appears that many of the loans cured naturally. For example, assume the hurricane caused 15% of loans to go delinquent and that one year later they have either cured or been bought out. If the buyout rate is 5 CPR then the cure rate must have been 15 CPR – 5 CPR, or 10 CPR. Therefore two-thirds of the delinquent loans cured naturally. It looks like borrower and lender assistance policies offered by Ginnie Mae, FHA, VA, and USDA allowed many loans to cure, protecting investors from unnecessary prepayments.
Conventional MBS prepaid far faster than Ginnie Mae MBS
Conventional Puerto Rico pools exhibited much worse prepayment behavior than Ginnie Mae MBS following the hurricane. Prepayments increased over the first half of the year and peaked over 40 CPR, much faster than the peak 8 CPR in Ginnie Mae pools. This is shown in Exhibit 3:
Exhibit 3: Conventional pools prepaid much faster than Ginnie Mae
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Even though Freddie Mac reports pool-level buyouts, the Puerto Rico prepays were reported as voluntary prepayments.
Pay-ups for Ginnie Mae Puerto Rico pools are very low
The prepayment protection offered by Puerto Rico pools appears to be undervalued in the market. Exhibit 4 shows that pay-ups for 2013 vintage 3.5% and 4.0% coupon Puerto Rico pools are roughly 20% of theoretical value. This was calculated by selecting two representative 100% Puerto Rico pools and running them at the same OAS as the TBA.
Exhibit 4: Puerto Rico payups are extremely low (as of 1/9/2019)
Source: Yield Book, Amherst Pierpont Securities
Each pool is run two different ways:
- Yield Book’s production model
- Dial Yield Book to run 2 CPR faster, to account for elevated buyout rates
Actual pay-ups are much lower than theoretical pay-ups in both cases.
Conclusion
Puerto Rico pools have historically prepaid very slowly. But investors feared that the hurricane would cause a huge increase in prepayment speeds, which has likely suppressed payups for these pools. However, Ginnie Mae MBS did not experience a large increase in prepayment speeds, and delinquency rates are approaching historical levels. Therefore prepayment speeds should be reasonably close to historical experience. Low payups make these pools look very attractive.
Investors should also note that the Ginnie Mae pools never experienced a large spike in prepayments following the hurricane. Borrower and lender assistance policies offered by Ginnie Mae, FHA, VA, and USDA allowed many loans to cure, protecting investors from unnecessary prepayments. Fannie Mae and Freddie Mac Puerto Rico pools did not fare as well, prepaying over 40 CPR last summer.
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