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A picture of servicer speeds before and after pandemic
admin | November 13, 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.
MBS prepayment speeds have been extremely fast during the pandemic, fueled by record low interest rates. Speeds have not reached these levels since before the 2008 financial crisis. Some servicers tend to be more efficient at refinancing their loans, and it appears most of those servicers remained fast during this refinance wave. On the other hand, the slower services tended to remain slow, and investors that bought their pools likely benefited during this refi wave.
Most large servicers stayed true to their past performance
Comparing the 40 largest servicers’ prepayment performance during the pandemic to the 12 months preceding the pandemic shows that most servicers’ prepayment behavior did not change much after the onset of the pandemic (Exhibit 1). The x-axis represents each servicer’s relative prepayment performance in the 12 months prior to the pandemic, while the y-axis measures relative performance after the onset of the pandemic. A servicer’s relative performance measures the percentage faster or slower that servicer’s loans prepay compared to a benchmark pool of loans. A positive number indicates that servicer’s loans prepay faster than average. This data is available on the APS Servicer Ranking Report (Top 40 and Top 200).
The exhibit shows that fast servicers generally remained fast, and slow servicers generally remained slow. There is a 0.89 correlation between prepayment performance across the two time periods, which confirms the observation that a servicer’s behavior tended to be consistent between the two periods. Perhaps the largest change came from United Shore, which prepaid 20% faster in the months prior to the pandemic but fell to 1% slower than benchmark during the pandemic.
Exhibit 1: Most top 40 servicers prepaid similarly before and during the pandemic
Servicer performance is the percentage faster(slower) that servicer’s loans prepaid compared to a comparable cohort of all loans. The comparison controls for a servicer’s mix of factors such as loan balance and geography to measure a servicer’s unique contribution. A score of +25 represents 25% faster than the market benchmark, and -25 represents 25% slower. Data includes Fannie Mae and Freddie Mac 30-year fixed rate loans and is available on APS’s Servicer Prepayment Ranking Report (Top 40 and Top 200).
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
The top-left quadrant, labelled “Worse”, includes servicers with behavior that flipped from slower than average to faster than average. The bottom-right quadrant, labelled “Better”, indicates the opposite. But very few servicers appear in either of those quadrants since prepayment behavior was so stable.
Extending the analysis to a larger group of servicers shows similar results (Exhibit 2). The correlation coefficient falls to 0.70, but that still indicates a high level of consistency between behavior before and during the pandemic. Most servicers maintained their fast or slow behavior. Only 27% of servicers flipped, and many of them only by small amounts.
Exhibit 2: Most smaller servicers did not prepay differently during the pandemic
Servicer performance is the percentage faster(slower) that servicer’s loans prepaid compared to a comparable cohort of all loans. Data includes Fannie Mae and Freddie Mac 30-year fixed rate loans.
Source: Fannie Mae, Freddie Mac, eMBS, Amherst Pierpont Securities
Servicer behavior can be finicky. A change in business practices can have a sudden effect on prepayment speeds. However, thus far in this refi wave big changes appear to be the exception and not the rule, rewarding investors that owned pools backed by the slower servicers.
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