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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

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

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