Uncategorized

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.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.