Uncategorized

October prepayment surprises

admin | October 9, 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.

Agency MBS last month printed its fastest overall prepayment speed since April 2004. Speeds in Fannie Mae’s 30-year MBS jumped by 8% in September and Freddie Mac’s by 6%. Consensus had expected speeds to come in roughly unchanged. Ginnie Mae II speeds fell 1% last month and once again evaded the risk of mass buyouts by most servicers. Most non-banks continued to buyout very few delinquent loans, and most banks that have bought out loans have very few delinquent loans left in pools. A few lenders did increase buyouts, however, including Banco Popular, pushing speeds on Puerto Rico specified pools to unexpected heights.

Looking ahead

Prepayment speeds should come in relatively unchanged in October. Although prepayments did pick up in September, most originators are still operating at capacity and have little ability to refinance more borrowers. Lagged mortgage rates have fallen another roughly 8 bp, yet the MBA Refinance Index remained relatively unchanged in September (Exhibit 1). There is an additional half business day, but seasonal housing turnover should decline.

Exhibit 1: The MBA’s Government Refinance Index jumped in September

Source: MBA, Bloomberg, Amherst Pierpont Securities

The MBA Government Refinance Index does raise a warning flag, however. It has jumped markedly since the start of September. The VA component has increased about 20% and the FHA component by roughly 25%. It may be that originators can process more government loans since the FHA and VA offer easy streamlined refinance programs.

Some evidence of originator capacity comes from the relationship between the refinance index and the prevailing mortgage rate (Exhibit 2). The Freddie Mac survey rate is used as a stand-in for mortgage rates. Since March, the index has struggled to exceed 4,000 even as mortgage rates have fallen from 3.25% to 2.88% at the end of September.

Exhibit 2: The overall refinance index did not increase as mortgage rates fell in September

Source: MBA, Bloomberg, Amherst Pierpont Securities

Buyout risk

Ginnie Mae buyouts were mostly tame, but a few lenders step up the pace

Most lenders continued to permit their delinquent loans to stay in Ginnie Mae pools rather than exercise their option to buy them out at par (Exhibit 3). Among large non-banks, only Carrington bought out an appreciable number of loans, 18.8% of their loans at least 60 days delinquent.

Within the bank servicers, a couple of new participants in buyouts showed up, Banco Popular and Navy Federal in particular. The big surprise was Banco Popular, which had not taken advantage of delinquent loan buyouts after Hurricane Maria hit the island in 2017. This drove speeds on Puerto Rico spec pools to nearly 60 CPR. Banco Popular is roughly 4% of all outstanding Ginnie I pools, and the buyouts drove speeds on that program 15% faster.

Exhibit 3: Ginnie Mae non-bank buyouts remained low in September

CRR—conditional repayment rate (voluntary prepayments); CBR—conditional buyout rate.
Source: Ginnie Mae, Amherst Pierpont Securities

The Fannie and Freddie numbers

Fannie Mae 30-year prepayment speeds increased 8% and Freddie Mac 30-year speeds up 6%. The biggest jump came in the 2.5% coupon, which is ramping up quickly as more loans originated in 2020 approach six months of seasoning. The 2.5%s 2019 exceeded 50 CPR, one of only 3 large cohorts to do so, and could be an indicator of where 2.5%s 2020 speeds are headed. Street consensus and Amherst Pierpont expectations were for roughly flat speeds—the MBA refinance index had been falling steadily even though lagged mortgage rates had dropped roughly 3 bp, while day count was unchanged.

Exhibit 4: Conventional speeds increased in September

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

Many GSE loans have cured without a buyout

The number of loans in forbearance continued to decline, and many of these loans appeared to cure without a buyout (Exhibit 5). The MBA notes in their most recent survey that conventional forbearance has fallen to 4.39%, which is 31% below the peak of 6.40% on May 31. The number of delinquent loans in MBS pools has fallen similarly, to roughly $210 billion (4.1%) on October 1 from $301 billion (6.0%) on June 1. This includes all loans at least 30 days delinquent in conventional MBS pools. However, buyouts have totaled only $6.5 billion since the beginning of June, which is well below the drop in delinquent loans. This implies most of those loans cured over that time.

Exhibit 5: Share of loans in forbearance

Source: Mortgage Bankers Association, Black Knight, Amherst Pierpont Securities

Data Tables

Exhibit 6: Prepayment Summary

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

Our short term forecast is shown in Exhibit 9 (Fannie Mae) and Exhibit 10 (Freddie Mac). Exhibit 8 shows the static rates used in the prepayment forecast.

Exhibit 7: Agency Speeds, Largest Cohorts

Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities

Exhibit 8: Mortgage Rate Forecast

Source: Freddie Mac, Bloomberg, Amherst Pierpont Securities

Exhibit 9: Fannie Mae Short Term Forecast

Source: Fannie Mae, eMBS, 1010data, Amherst Pierpont Securities

Exhibit 10: Freddie Mac Short Term Forecast

Source: Freddie Mac, eMBS, 1010data, Amherst Pierpont Securities

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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 © 2024 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.