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Prepayment speeds surprise in October
admin | November 6, 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. This material does not constitute research.
Conventional and government MBS prepayment speeds surprised again in October, rising for the second consecutive month. Street forecasts projected roughly unchanged speeds last month despite an additional half business day. Housing turnover typically slows in October, and refinancing appeared ready to slow as well since the lagged MBA refinancing index had fallen. But the pandemic has kept interest in housing very high as people look for larger places for working from home. A few non-bank Ginnie Mae servicers bought out loans this in October, but the pace of non-bank buyouts remains well below the pace set by the banks since June.
Looking ahead
Prepayment speeds should drop roughly 5% in November, which is typically a very slow month. November has two fewer business days due to Thanksgiving and Veteran’s Day, and there are some indications that interest in buying a home has started to slow. Lagged mortgage rates are slightly lower, however, and the refinance index has recently moved slightly higher. An increase in refinancing should offset some of the calendar slowdown.
The MBA government refinance index has moved sharply higher since mid-September, and this is primarily due to FHA loans (Exhibit 1). Originators may be turning their attention to FHA loans as their pool of refinanceable conventional and VA borrowers shrinks. Loan officers tend to focus on larger loans first and FHA loans tend to be smaller on average.
Exhibit 1: FHA refinance applications have increased since mid-September
Source: MBA, Bloomberg, Amherst Pierpont Securities
The aggregate MBA refinance index remains below 4,000 even though mortgage rates continued to fall in October, which suggests the industry remains capacity constrained. Otherwise the refinance index should have moved significantly higher. The purchase index has fallen since mid-September, so it is possible that loan officers are shifting to process more refinance loans as purchase volume declines.
Exhibit 2: The MBA refinance index stayed below 4,000 while mortgage rates fell in October
Source: MBA, Bloomberg, Amherst Pierpont Securities
A modest increase in non-bank Ginnie Mae buyouts
The two largest non-bank Ginnie Mae servicers—PennyMac and Lakeview—bought out more delinquent loans in October, increasing the non-bank buyout rate to 5.6 CPR from 3.6 CPR in September (Exhibit 3). They each bought out roughly 8% of their loans that were least 60 days delinquent at the start of October, which is still well below the pace set by the big banks starting in June. Most other non-bank servicers bought out very few delinquent loans, including other large servicers like Freedom, Nationstar, and Quicken. Many banks continue to buyout all eligible delinquent loans, but the dwindling supply of these loans reduces the impact of these buyouts to investors.
Many loans not already bought out could cure this month. The MBA and Black Knight both indicated that roughly 12% of Ginnie Mae loans exited forbearance in October. Since most non-bank servicers did not buyout many delinquent loans, it is likely that their portfolios could show a significant number of loans cure. Presumably PennyMac and Lakeview focused their buyouts on the loans that were about to cure, because they would no longer be able to buyout those loans after they cure.
This data suggests that most Ginnie Mae loans did not require a loan modification. Mandatory buyouts due to loan modification would happen immediately since FHA loans do not require a trial period following Covid-19 forbearance. It is likely that few of the conventional loans that cured in October required a loan modification, since few FHA loans did. Any conventional buyouts would not happen until then end of a 3- or 4-month trial period. The prospect of a pickup in conventional buyouts in a few months appears to be low.
Exhibit 3: Ginnie Mae non-bank buyouts increased 2 CPR in October
CRR—conditional repayment rate (voluntary prepayments); CBR—conditional buyout rate.
Source: Ginnie Mae, Amherst Pierpont Securities
The Fannie Mae and Freddie Mac numbers
Fannie Mae and Freddie Mac 30-year prepayment speeds each increased 7% in October to 36.9 CPR. The largest increase came in the 2.5%s 2020, which jumped 33.8% to 19.8 CPR. The Fannie Mae 2019 vintage of that coupon prepaid at 53.3 CPR and the 2.5% pools issued in January, February, and March of this year have all topped 50 CPR. Within that coupon, low loan balance spec pools prepaid much slower, ranging from the high single digits for LLB and MLB pools to 23.6 CPR for Max $250K pools. But 100% Texas pools exhibited much less prepay protection than any of the other pool types, printing 41.2 CPR.
Exhibit 4: Conventional 2.5% specified pool prepayment speeds
Fannie Mae and Freddie Mac 30-year 2.5% pools issued from August 2019 through March 2020. Speeds are from October 2020.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Exhibit 5: Prepayment speeds increased in October
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Exhibit 6: Many loans exited forbearance in October
Source: Mortgage Bankers Association, Black Knight, Amherst Pierpont Securities
Data Tables
Exhibit 7: Prepayment Summary
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, Amherst Pierpont Securities
Our short term forecast is shown in Exhibit 10 (Fannie Mae) and Exhibit 11 (Freddie Mac). Exhibit 9 shows the static rates used in the prepayment forecast.
Exhibit 8: Agency Speeds, Largest Cohorts
Source: Fannie Mae, Freddie Mac, Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities
Exhibit 9: Mortgage Rate Forecast
Source: Freddie Mac, Bloomberg, Amherst Pierpont Securities
Exhibit 10: Fannie Mae Short Term Forecast
Source: Fannie Mae, eMBS, 1010data, Amherst Pierpont Securities
Exhibit 11: Freddie Mac Short Term Forecast
Source: Freddie Mac, eMBS, 1010data, Amherst Pierpont Securities
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