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Filtering the effect of servicer out of prime jumbo speeds
admin | November 8, 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.
Investors in prime jumbo deals have taken some rough prepayment hits this year. Late 2018 and early 2019 trusts backed by loans with high weighted average coupons and significant refinancing incentives have seen speeds spike higher. While the servicer matters a little, the WAC matters a lot.
The prepayment risk in prime PLS trusts has come from a substantial drop in primary mortgage rates. The national average prime jumbo rate fell by roughly 90 bp between January and August, from a January peak rate of 4.57% to an August low of roughly 3.67% (Exhibit 1).
Exhibit 1: From January to August, prime jumbo rates fell 90 bp
Source: Bankrate, Bloomberg, Amherst Pierpont Securities
As jumbo rates fell, prepayments skyrocketed. Jumbo rates have by and large remained at August levels, creating sustained refinancing incentive for higher WAC loans in prime jumbo deals. Faster absolute speeds across certain originators appear to be driven more so by higher average WACs than others rather than an originator effect in isolation.
Speeds across the vast majority of late 2018 and early 2019 vintage prime jumbo trusts have run above 40 CPR with certain deals printing 1-month speeds greater than 70 CPR. Originators with lower average WACs have not contributed to those fast speeds.
A clear example of this is JPMMT 2018-9, which was issued in October last year with a 4.62% gross WAC, roughly in line with the peak prime jumbo rate this year. The deal has paid roughly 40 CPR or faster the past three months. Looking at speeds across originators contributing to the deal, those with average WACs less than 4.375% have not prepaid at all while those with WACs greater than that rate have prepaid close to 50 CPR (Exhibit 2). Given this, investors should note the WAC distribution across pools. More barbelled pools can lead to more idiosyncratic prepayments.
Exhibit 2: WAC dispersion matters in prime jumbo prepayments
Source: Amherst Insight Labs, Amherst Pierpont Securities
There are other factors outside of WAC that will drive prepayments: loan size, credit, spread at origination (SATO) and turnover along with a handful of other factors. If WAC or these other variables differ across servicers, investors might assume the impact is due to the servicer. Looking at 30-year prime jumbo prepayment rates across servicers after adjusting for SATA and loan balance shows some interesting results.
Exhibit 3: SATO adjusted S-curves across major prime originators
Source: Amherst Insight Labs, Amherst Pierpont Securities
Based on this methodology, First Republic has the flattest S-curve or responsiveness to refinancing incentive. The First Republic s-curve steepens materially given 75 bp of incentive, however this is on a relatively small sample of loans, which may lead to some idiosyncratic observations. Other bank originators like JP Morgan and Wells Fargo demonstrate relatively similar responsiveness to refinancing incentive while certain non- bank originators like Quicken and Loan Depot appear to be modestly faster than bank servicers. United Shore appears to have a flatter S-curve than other non-bank servicers and faster prepayment speeds may be largely a function of higher WACs and greater incentive than other slower paying originators in the same pool (Exhibit 3).
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