In New York, even fast servicers slow down
admin | November 22, 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.
New York loans typically prepay slowly when interest rates fall thanks to high closing costs. The state, counties and municipalities all charge a tax to record a new mortgage, and other closing costs tend to be higher than the rest of the country. Even the fastest servicers’ loans prepay much slower than a typical TBA pool. Theoretical pay-ups on those pools should range from $1-21 to $2-04 and are more likely to be found at a significant discount to theoretical since many investors will avoid servicers known to prepay quickly. Those pools could be a good opportunity to find inexpensive call protection.
Fast servicer’s New York loans have flat S-curves
Investors typically consider loans serviced by Quicken and Freedom Mortgage to have a faster refinancing trigger than other loans. These servicers historically have been more likely to contact borrowers about refinancing, and this tends to lift prepayment speeds. While Quicken’s speeds have improved over the last few years and Freedom’s worst performance is in VA loans, both are still faster conventional lenders. For example, Amherst Pierpont’s latest servicer prepayment ranking report of the 40 largest servicers shows that Quicken was the #3 fastest conventional servicer over the last 12 months, and Freedom was the #4 fastest servicer.
Both servicers’ New York loans look much better, however (Exhibit 1). The exhibit shows S-Curves for New York loans serviced by Quicken, Freedom Mortgage, Chase, and Wells Fargo—the latter two combined to make the graph easier to read.
Exhibit 1: Even fast servicer’s New York loan have flatter S-curves than TBA
Note: Fixed 30-year owner-occupied loans with original balance greater than $200,000 were used. Performance is from January 2016 to present, for 2013 and newer vintages.Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
Quicken’s S-curve, while steeper than Chase and Wells, is still substantially flatter than that of generic loans. Interestingly Quicken’s speeds out-of-the money look faster, so actually might offer extension protection relative to a typical New York loan. Freedom’s S-curve looks quite similar to Chase and Wells.
Faster New York loans should still command high pay-ups
The theoretical pay-up for New York loans was calculated by running the Fannie Mae October major pools through Yield Book’s production model at the TBA’s OAS (Exhibit 2). The same pools were run through two dialed versions of the model. The first slowed refinance speeds to match Quicken’s S-curve, and the second slowed turnover and refinance speeds to match the Chase/Wells S-curve. The same OAS was used to each coupon. The price difference is the pay-up over the new issue major pool. Note that the new issue pools should also command a pay-up over the TBA, since the pools are low WALA. So the full pay-up for the New York pools would include that amount as well.
Exhibit 2: Fast servicer New York loans still command sizable pay-ups
Note: The TBA is proxied using an October multi pool. New York pool valuations are run by slowing the Yield Book model’s refinance function to account for the flatter NY S-curves, and running the pools at the corresponding TBA’s OAS. The price difference to the multi pool is the theoretical payup on top of any payup for low WALA. Source: Yield Book, Amherst Pierpont Securities
The best relative value looks like it sits in the New York pools from the fastest servicers. The market punishes fast servicers, but history suggests they slow more than expected in New York.
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