Uncategorized
Little benefit from removing VA high LTV cash-out refis
admin | May 10, 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 continues to focus on fast prepayment speeds in VA loans, which is encouraging for investors. Recently Ginnie Mae asked for input on possibly limiting or excluding certain VA cash-out refinances from multi-lender pools since these VA loans have prepaid extremely quickly. While this change helps investors, recent prepayment history suggests any improvement will be very small.
The proposal
Ginnie Mae is suggesting that VA cash-out refinances with original LTV greater than 90% should be excluded from the multi-lender pool program or possibly subject to pooling limits. This is based on an analysis of prepayment speeds from January 2017 through March 2019.
The FHA program along with Fannie Mae and Freddie Mac has LTV caps on cash-out refinances, so it is reasonable to consider why the VA should be different. Congress raised the VA cash-out limit in 2008 from 90 LTV to 100 LTV. The VA appears to believe their program should follow congressional intent, while Ginnie Mae has to consider whether including unusual loans in multi-lender pools is reasonable.
The multi pools won’t slow much
If Ginnie Mae had excluded high LTV VA cash-out refinances from pools in the past, the impact on speeds would have been small (Exhibit 1). It is worth considering the impact in three different time frames:
- Performance in 2016, which is before Ginnie Mae’s first attempt to curb excessive VA prepayment speeds.
- Performance in 2017 and part of 2018, which is after Ginnie Mae began to restrict VA refinances but before additional congressional legislation enacted in May 2018.
- Performance after the May 2018 legislation.
Exhibit 1: Removing high LTV cash-out refis hardly improves speeds

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Almost every cohort would have slowed less than 1.0 CPR if Ginnie Mae had excluded the VA loans, and most would have slowed far less than that level. Part of the reason is that these loans do not make up a large share of overall production, so even if they prepay significantly worse, removing them has little effect. Only about 4% of the 2018 multi-lender pools, for example, were VA cash-out refinances with LTV greater than 90%.
Potential improvement in speeds has declined following Ginnie Mae and congressional measures to improve VA prepayment speeds; all but one cohort would slow less than 0.3 CPR.
Speeds have already improved
Since enacting the May 2018 legislation, the high LTV VA cash-out loans don’t appear to prepay much worse than other VA cash-out loans. Prepayment seasoning ramps comparing prepayment speeds of VA cash-out refinances to rate/term refinances, streamlined refinances, and purchase loans only shows clear speed differences for purchases (Exhibit 2). All loans are less than 50 bp in-the-money with performance beginning in June 2018.
Exhibit 2: All VA refis have similar seasoning ramps

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Purchase loans clearly prepay much slower than the various refinance loans, but cash-out refinances are not terribly different than the other refinances. In fact initially they seem to prepay a little slower, but do spike a little faster when speeds ramp up after seven months.
Separating the cash-out refinances by original LTV suggests very little difference in prepayment behavior based on the LTV (Exhibit 3).
Exhibit 3: Original LTV hardly affects cash-out seasoning ramps

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
None of the seasoning ramps suggest that high LTV cash-out refinances, or cash-out refinances in general, have been prepaying unusually relative to other VA loans.
Cash-out S-Curves are consistent with other VA refinance S-Curves
VA S-curves support the observation that cash-out refinances prepay at a pace similar to other refis. It is VA streamlined refinances, not the cash-outs, that stand out with a significantly steeper S-curve (Exhibit 4).
Exhibit 4: Only VA streamlines refis have steep S-curves

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
Comparing S-curves for VA cash-out refinances by original LTV, the S-curves for loans with original LTV greater than 90% do appear to be a little steeper, but the difference is fairly small (Exhibit 5).
Exhibit 5: Higher original LTV marginally steepens the S-curve

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
A different reason Ginnie Mae might target cash-out refinances
The May 2018 legislation declined to place constraints on VA cash-out refinances, instead requiring the VA to conduct a study and provide rulemaking to handle these loans. These rules became effective in February 2019, but in the meantime lenders theoretically could have bypassed the net tangible benefit and fee recoupment tests by doing a cash-out refinance. However, this loan would cost more to originate than a streamlined refinance, which should have reduced the appeal.
Ginnie Mae might be concerned that the cash-out program was elevating speeds across all VA loans, not that these loans necessarily prepay faster themselves. Making these loans more expensive would therefore slow all VA speeds. Unfortunately the disclosure data is insufficient to study this idea. And it is possible that the VA’s recent rules will be sufficient to eliminate any abuse of the cash-out refinance program.
How should these loans be handled?
Ginnie Mae has proposed that these loans could be excluded from the multi-lender pool program entirely. They would be permitted in custom pools, and possibly in a new, TBA-ineligible, multi-lender pool type to hold these and other loans expected to prepay rapidly shortly after origination. An alternative is to continue permit these loans to be included in the multi-lender pools subject to a de minimis limit, like jumbo loans.
Given that these high LTV cash-out refinances don’t appear to prepay too differently than other refinances it seems that exclusion from the multi-lender program is probably overkill. It is also unusual that these loans would be excluded while, for example, modified loans would continue to be permitted in multi-lender pools without limitation and jumbo loans would be subject to the de minimis limit.
Instead, imposing a de minimis limit might be sufficient. Although aggregate production of these loans is well below 10%, it is important to remember that the de minimis threshold is applied per-lender within each pool. So any abusive lender that originates far too many of these loans would find much of their supply locked out of the multi-lender pools, while responsible lenders with more reasonable volume would still be able to deliver their production into the multi-lender pool.
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 © 2025 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.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.