Prepay protection from lower loan sizes in Ginnie Mae project loans
admin | February 15, 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.
Commercial mortgage loans guaranteed by Ginnie Mae have gradually been increasing in average size. The dispersion of loan sizes has been widening as well, as larger loan sizes become more frequent. This is reflected in Ginnie Mae project loan deals where the weighted average loan size has been rising. Residential mortgage-backed securities with smaller average loan size have long traded at a premium to jumbo or larger balance pools due to their lower prepayment speeds. Commercial mortgage-backed securities with smaller underlying loan sizes exhibit similar prepayment trends. Ginnie Mae project loan deals continue to offer a broad dispersion of loan sizes, allowing investors to target exposure to the additional prepayment risk.
Commercial mortgage loan size and deal size rises
The multifamily property sector comprises 74% of the underlying collateral in Ginnie Mae project loan deals, with healthcare loans making up the other 26%, on an average basis since 2010. Multifamily property prices have been the strongest performing sector of the commercial real estate market since 2010. Rising property prices have been one factor behind the increase in average size of Ginnie Mae project loans (Exhibit 1), and the concurrent increase in weighted average loan size of the deals at origination (Exhibit 2).
Exhibit 1: Ginnie Mae project loans – changes in size over time
Note: Data reflects PN pools, which have accounted for around 87% of project loan issuance since 2001. PN pools consist of a single, non-level payment FHA-insured or Rural Development, RD-guaranteed project loan with a first scheduled payment no more than 24 months prior to the issue date of the securities and has not been modified subsequent to FHA’s final endorsement. Source: Ginnie Mae, Intex, Amherst Pierpont Securities.
Although the average loan size has been rising in the underlying collateral, there is still a significant amount of dispersion in weighted average loan size across deals. Most GNR deals in 2018 varied from $10 million to $40 million weighted average loan size. Given that the median loan size in 2018 was $9 million and the average loan size was just below $14 million, deals at the upper end of that range are capturing a lot of tail risk by including a selection of large-sized loans.
Exhibit 2: Ginnie Mae project loan deals – change in weighted average loan size
Note: Original weighted average loan size of Ginnie Mae project loan deals; graph excludes a handful of outlying deals with one or a small number of very large loans whose weighted average loan size was between $100 and $600 million. Source: Ginnie Mae, Bloomberg, Amherst Pierpont Securities.
Prepayment risk rises as loan size increases
The commercial multifamily loan market shows a similar trend to the residential mortgage loan market, in that larger multifamily loans prepay at a faster rate than smaller loans for any given refinance incentive (Exhibit 3). Assuming a 50 bp refinance incentive, a $20 million multifamily loan will prepay at 50 CPR while a $5 million project loan will have a speed of 20 CPR.
Exhibit 3: Larger loans prepay faster for any refinance incentive: impact of loan size on CPR with a 50 bp incentive.
Note: data reflect voluntary prepayments from January 2014, after introduction of streamlined refinancing through the Interest Rate Reduction Program, through August 2018. Source: Amherst Pierpont Securities.
Investors can take advantage of the difference in prepayment speeds by either targeting new project loan deals with smaller weighted average loan sizes, or favoring seasoned deals where the weighted average loan size has declined over time as the larger loans have prepaid.
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