By the Numbers

A rush to the refi exits

Mary Beth Fisher, PhD | March 19, 2021

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.

Prepayment speeds in Ginnie Mae project loans actually ticked higher in February. And despite a sharp rise in 10-year Treasury rates, commitment rates last month stood only modestly above the historic lows of November. This is unlikely to last much longer as investors are already looking for higher coupons in new project loan pools, in part to buffer the impact of extension risk if rates continue to rise.

An acceleration in prepayment speeds

Project loan prepayment speeds were up across almost all penalty categories and most vintages in February, with the monthly weighted average speed rising from 29.3 CRR in January to 37.2 CRR in February (Exhibit 1). That was close to the pandemic high speed of 40.7 CRR in December 2020, when the 10-year Treasury rate closed in a channel of 90 to 95 bp for virtually the entire month.

Exhibit 1: Prepayment speeds by penalty points remaining on the loan

Note: CRR is voluntary prepayments as a percentage of the outstanding deal balance excluding loans in lockout. This matches Intex’s CPR when forecasting. Prepayment speeds through February 2021.
Source: Amherst Pierpont Securities

Borrowers had ample time to refinance their loans over the past year, though there was clearly a rush to lock in low rates as vaccines became more widely available and the economy notched some notable improvements. The Fed doubling down on its promise not to raise short rates as the pandemic continues to retreat sparked a sell-off in the long-end of the curve, no doubt fueling the stampede. On a rolling 3-month basis prepayment speeds exceeded their previous multi-year highs.

Project loan borrowers who did not refinance at the trough were not terribly penalized. The spread between project loan commitment rates and the yield on the 10-year remained stuck near recent highs for months during the pandemic (Exhibit 2). As the 10-year Treasury rate rallied through most of 2019, project loan rates fell mostly in-line, with the spread between the two staying roughly around 150 bp. The pandemic-induced drop the 10-year Treasury yield in 2020 also put downward pressure on commitment rates, but the sharply widening spread between the two offset some of the gain, particularly in the early months of the crisis.

Exhibit 2: Ginnie Mae project loan commitment rates versus 10-year Treasury

Note: Data through February 2021.
Source: Amherst Pierpont Securities

The spread began to compress substantially during the late summer and through the fall, with project loan rates on average falling to 2.50% from November 2020 through February 2021. The average rates for March delivery only rose 21 bp to 2.71% despite a 40 bp rise in the 10-year during the month of February as spreads dropped below 150 bp.

Investors eye extension risk

The irony of an acceleration in prepay speeds during a sell-off is that it can refocus investors on extension risk, if the presumption is that rates have further to run. Investors seeking higher coupons to offset potential extension risk could pressure the spread between commitment rates and the 10-year Treasury wider. Lower-priced new origination pools—those with lower coupons—are currently being quoted at wider spreads than high dollar-priced, higher-coupon pools. This unusual inversion is almost certainly a reflection of investors seeking to offset potential extension risk by buying the higher coupon production. The shift in demand will possibly result in a widening of average spreads until the recent volatility in the 10-year subsides.

Involuntary prepayments on the horizon

Involuntary prepayments in Ginnie Mae project loans have historically been a relatively infrequent event (Exhibit 3). The vintages with the highest rates of involuntary prepays to date have been those exposed to the housing crisis, where lifetime rates of prepayment due to default have ranged from 0.6% to 1.5%. The 2011 vintages onward have experienced very low levels of default with lifetime involuntary prepay rates of 0 to 4 bp. Defaults also tend to cluster around balloon prepayment dates. The average CDR spikes to 2.2 at the 10-year mark since issuance.

Exhibit 3: Involuntary prepayment speeds by year since issuance (CDR)

Note: CDR is involuntary prepayment speeds as a percentage of the total deal balance. Data through February 2021.
Source: Amherst Pierpont Securities

Defaults that were likely in part due to the pandemic began appearing sporadically across some vintages during the summer of 2020. The average involuntary prepayment rate jumped to 0.7 CDR in November but fell back to 0.0 – 0.1 the following three months. The lull probably will not last. Involuntary prepayments are likely to rise over the next six months to 18 months as some percentage of loans that entered forbearance or were otherwise impacted by the pandemic and are currently delinquent begin to default and enter workout (Exhibit 4).

Exhibit 4: Delinquency/forbearance analysis of Ginnie Mae project loans

Note: Loans that are in forbearance are not identified by Ginnie Mae, but are simply marked as being delinquent. UPB in millions. Data as of 3-18-2021.
Source: Bloomberg, Amherst Pierpont Securities

There are currently about 7,900 loans comprising $117 billion of UPB outstanding in Ginnie Mae project loans categorized as multifamily (73%) or health care (27%) properties. Loans that are in forbearance or otherwise delinquent are somewhat overweight healthcare properties (31%), as the sector experienced some of the most severe impact from the pandemic. Overall 1.5% of outstanding project loan balances are in some stage of delinquency / forbearance. It’s unclear what percentage of these loans will eventually default. The exposure to loans that are delinquent or in forbearance by vintage varies considerably (Exhibit 5). Of those with larger outstanding balances, the 2010, 2011 and 2017 vintages have greater risk to involuntary prepayments.

Exhibit 5: Delinquency / forbearance risk by vintage in project loans

Note: Some loans do not have a property type listed so the outstanding balance of all project loans is somewhat higher than the total when identified by property type. Data as of 3-18-2021.
Source: Bloomberg, Amherst Pierpont Securities

Mary Beth Fisher, PhD
marybeth.fisher@santander.us
1 (646) 776-7872

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