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A bit of relief from fast prepayments

| August 7, 2020

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.

MBS prepayment speeds were slower than feared in July, bringing some relief to investors weary of the unexpectedly fast speeds of the preceding three months. Fannie Mae 30-year MBS increased only 1% in aggregate while Freddie Mac 30-year MBS slowed 2%. This was slower than the consensus expectation of a 7% increase and our projections for a 10% pickup. Faster speeds were anticipated because lagged mortgage rates were 5 basis points lower and housing turnover has been surging since mid-April. The pause in accelerating speeds is likely to be brief, since lagged mortgage rates have continued to fall and August speeds are now projected to rise by 5%.

Prepayment speeds were elevated over the past few months while originators worked through the surge of refinance applications in early March, which extended closing times. Market participants have adjusted speed expectations higher each month but eventually the backlog of applications was going to be resolved and speeds would return to more typical levels, and this is likely what happened in July.

The bulk of the gains came from 2.5%s and 3.0%s, and in 2020 production. Pools with coupons between 3.5% and 5.0% were either unchanged or prepaid slightly slower. However, 2020 vintage Freddie pools didn’t increase nearly as much as Fannie pools. The most extreme example is 2020 4.0%s, which jumped 56.2% in Fannie’s but only 7.1% in Freddie’s.

Slower buyouts push Ginnie Mae speeds down, but voluntary speeds increase

Ginnie Mae I speeds slowed 26% and Ginnie Mae II speeds fell 4% as the pace of buyouts slowed in July, according to Ginnie Mae’s preliminary loan-level buyout data. However, voluntary speeds increased in July. Within the Ginnie II program, voluntary speeds increased 8% to 29.7 CPR while buyout rates fell 36% to 8.0 CPR.

Many banks continued to buyout loans as soon as they became eligible. However, fewer of these loans remained after the high buyouts in June, which caused the aggregate buyout rate to fall (Exhibit 1). Meanwhile non-bank servicers continued to buyout very few loans. The aggregate delinquency rate continues to diverge between bank and non-bank servicers. Over 12.5% of loans in non-bank pools are at least 1 month delinquent, but this is true of only 7.5% of loans in bank pools.

Exhibit 1: Banks continue to buyout a lot of loans in July, but the pace is slowing.

Note: August delinquency rates are estimated using true July loan level prepayments and historical roll rates. Ginnie Mae reports delinquency data on the 6th business day.  Voluntary and involuntary prepayment speeds are calculated using Ginnie Mae’s 4th business day loan-level liquidation file.  Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

This table uses loan-level data that Ginnie Mae publishes on the 4th business day that distinguishes the reason a loan pays off, so can be used to calculate voluntary prepayment speeds and buyout rates. The file does not include August delinquency rates, so those are estimated using historical roll rates and the true loan-level prepayments. A servicer’s efficiency at buying out eligible loans can be estimated by calculating the percentage of 60+ day delinquent loans bought out.

Buyout behavior varies greatly by servicer. Bank buyouts are driven be a few of largest servicers, like Wells Fargo and U. S. Bank (Exhibit 2). MidFirst’s buyout rate also jumped in July. However, some banks have not bought out many loans at all, like Flagstar. A few non-bank servicers—PennyMac, Caliber, and Carrington—had somewhat elevated buyout rates but they were nowhere close to the fast banks. Most servicer’s voluntary prepayment speeds increased in July.

Exhibit 2: A few large banks continue to dominate buyouts.

Note:  August delinquency rates are estimated using true July loan level prepayments and historical roll rates. Ginnie Mae reports delinquency data on the 6th business day.  Voluntary and involuntary prepayment speeds are calculated using Ginnie Mae’s 4th business day loan-level liquidation file.  Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

A servicer can only buy out the loans that become 90 days delinquent during the month but that data isn’t available yet. For example, Wells Fargo bought out 62.6% of their 60+ day delinquent loans, but it is likely that they bought out 100% of eligible loans and that the loans they didn’t buy out resumed making payments in July so were not eligible.

Looking Ahead

Prepayment speeds should increase roughly 5% in August, as lagged mortgage rates continue to fall. The one month lagged refi index has increased about 10% in response to lower mortgage rates, but the increase is muted by one fewer business day. Also, many borrowers that refinanced over the last few months likely need to see even lower mortgage rates before they might be in-the-money to refinance a second time.

The future pace of Ginnie Mae buyouts will depend heavily on the economic recovery. It is possible that a second wave of delinquencies could result as some localities reenact shutdowns to prevent the spread of COVID-19, or due to the expiration of the CARES Act unemployment benefits.

Exhibit 3: Conventional speeds are flat while Ginnie speeds slow due to lower buyouts.

Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities

Data Tables

Exhibit 4: Prepayment summary

Our short term forecast is shown in Exhibit 7 (Fannie Mae) and Exhibit 8 (Freddie Mac). Exhibit 6 shows the static rates used in the prepayment forecast.

Exhibit 5: Agency spreads, largest cohorts

Exhibit 6: Mortgage rate forecast

Exhibit 7: Fannie Mae short term forecast

Exhibit 8: Freddie Mac short term forecast

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