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A few lenders get a quick start at new refinancings
admin | June 14, 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.
A mortgage origination market with thin margins can easily turn originators into either the quick or the dead, but the drop in interest rates this year has given new opportunity for the quick. Prepayment speeds at some originators over the last few months have jumped 30% faster than peers’ while other originators have slowed against peers. It’s an early look at how originators and servicers are responding to the latest episode of low rates.
APS measures servicers’ prepayment speeds each month against their peers’ controlling for collateral attributes such as loan size, borrower credit score, geography and other influences on prepayments. The measure captures trailing 3-, 6- and 12-month performance. For each servicer and horizon, APS calculates the percentage faster or slower that servicer’s loans prepaid compared to the aggregate speed of collateral with similar attributes. The measure highlights the unique impact of the servicer.
A few GSE servicers’ speeds picked up significantly over the last three months (Exhibit 1). The exhibit includes any Top 40 servicer, ranked by principal serviced, whose relative speeds changed by more than 5% either faster or slower. Two servicers prepaid much faster as rates fell—United Shore and Provident both jumped by roughly 30%. For example, United Shore pools prepaid 30.7% faster over 12 months but were much faster—62.3%—over the most recent three months.
Some servicers show better performance over the last three months. The most notable is Quicken, with relative performance that improved by roughly 5% as rates declined. USAA also bears mentioning as the most improved servicer of the group, suggesting these pools have flatter S-curves.
Exhibit 1: GSE servicer comparison (% above or below benchmark CPR)
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
Change came in Ginnie Mae servicers, too (Exhibit 2). The largest change was by HomeBridge, which sold a significant amount of its servicing to NewRez (called New Penn at that time) in late 2018. At the same time, NewRez’s performance improved substantially, suggesting that loans with slower than typical prepayments were sold to NewRez, and that HomeBridge’s remaining loans prepay much worse than other servicers’ loans.
Quicken’s performance also improved substantially in Ginnie Mae pools, even more than the improvement in their GSE pools. loanDepot.com also improved, likely due to efforts to control prepayment speeds in order to be readmitted to Ginnie Mae’s multi lender pool program. Ginnie Mae removed loanDepot.com from the program in February due to poor historical prepayment speeds.
Exhibit 2: Ginnie Mae servicer comparison (% above or below benchmark CPR)
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
A loan servicer can have a large influence over whether a borrower will prepay. A servicer that also originates loans does not want a borrower to refinance with another lender, and individual loan officers and brokers have incentive to increase business through contact with former clients. Business practices vary by lender, and therefore so do speeds, so investors need to stay on top recent servicer behavior, especially as rates fall and open the door to new refinancing.
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