By the Numbers

A hot housing market drives faster speeds

| June 11, 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.

MBS prepayment speeds look likely to remain fast in the West and Southeast thanks to a strong housing market. Sizable home price appreciation in these regions over the last three years has added significant home equity and made it easier for borrowers to sell their homes or do a cash-out refinance. Loans in the West also tend to have relatively high loan balances, contributing to faster speeds. And Fannie Mae and Freddie Mac tend to grant property inspection waivers at a higher rate in those states, which also may boost prepayments. While these factors may keep speeds high today, they may also limit extension risk if interest rates rise.

The geography of prepayments

Conventional prepayment speeds continue to show sizeable differences across geography despite a recent slowdown. The difference between Arizona, the fastest state, New York, the slowest, was 12.2 CPR over the last three months (Exhibit 1). US states fall roughly into buckets of five or six states each. Most of the buckets are roughly 0.5 CPR to 1.5 CPR wide, indicating the states within a bucked are relatively evenly distributed by prepayment speed. Red and orange states are faster than median, blue states are slower, and yellow is the mid-point.

Exhibit 1. MBS prepayment speeds vary considerably across the country

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

Most of the fast prepaying states are in the West and on the Southeast Coast while the slower states were generally in the middle of the country and the Northeast. New York and Florida are typically considered slower states. Borrowers in these states pay higher closing costs, in large part due to state mortgage taxes. Texas also has a reputation for being slower than average. However, over the last three months Texas’ speeds were middle of the pack. Florida speed were on the slow side, but not in the slowest group.

Larger loans in the West and Northeast

Loan size is a major contributor to prepayment speeds and loan size varies greatly across states. The smallest states have an average loans size close to $200,000 while the largest state’s average exceeds $400,000. Most of the high-balance states are in the West, which likely contributes to the fast prepayments in those states (Exhibit 2).

Exhibit 2. The largest loans are in the West and Northeast Coast

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

Florida and Texas both have higher than average loan sizes but did not prepay as quickly as other states with similar sizes. For example, both states prepaid slower than Georgia and Idaho.

Many states on the Northeast Coast also have large average loan sizes, but their prepayment speeds were not as fast as the western states. New York borrowers pay high mortgage taxes, and borrowers elsewhere in the Northeast may face other frictions that slow prepayments, like higher legal fees at closing. Loans tend to be smallest throughout the middle of the country, but states like Wisconsin, Illinois, and Missouri each prepaid faster relative to their loan size ranking.

A heatwave in housing

Another driver of prepayments is home price appreciation, which also varies from state-to-state. It is easier for borrowers with equity to move or refinance, or potentially do a cash-out refinance. The 3-year cumulative home price appreciation for each state using the FHFA’s home price index is a good benchmark (Exhibit 3). The hottest state was Idaho, along with many other western states. These states posted 3-year increases as high as 58.8%. California, however, ended up in the middle of the pack.

Exhibit 3. Home price growth has been strongest in the west and southeast

Home price appreciation is measured from March 2018 through March 2021 using the FHFA’s purchase-only index.
Source: FHFA, Amherst Pierpont Securities

Home prices also grew a lot in the Southeast. Consider a state like North Carolina, which exhibited fast prepayment speeds but is middle of the pack in loan size. Strong home price appreciation may explain the faster speeds.

The weaker HPA states were typically in the South, the Upper Midwest, and the Northeast. Many of these states appreciated less than 25% in the last three years, but even that is historically strong growth. Most of these states also have smaller loans and the combination contributed to slower prepayment speeds.

The geography of PIW

One final factor that has contributed to faster speeds over the last few years are property inspection waivers. In some states as few as 20% of loans received waivers in the last year, while in other states as many as 50% received waivers (Exhibit 4). The West led the pack in waivers, too.

Exhibit 4. Western states, Virginia, Maryland, and DC received the most appraisal waivers

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

It is possible that the GSEs are more comfortable granting waivers in areas with strong home price appreciation. This appears to be the case in the West. However, there are exceptions. For example, Tennessee has strong home price appreciation but a lower-than-average waiver rate. Many of the states in the southeast also have lower waiver rates, possibly due to concerns about the risk of hurricanes. And states like Minnesota have high waiver rates even though HPA has been tepid.

Another interesting hotspot for waivers is in Virginia, Maryland, and DC. Home price appreciation has been below average, but these areas have some of the higher appraisal waiver rates. Fannie Mae and Freddie Mac may be more comfortable with waivers in their own backyard.

There are examples of fast prepaying states with low waiver rates, however. North Carolina and South Carolina are a couple of examples. These states have somewhat smaller loans and lower waiver rates, but hot housing markets and faster prepayments. Whether a borrower receives an appraisal waiver may not matter much when house prices are skyrocketing. On the other hand, a state like Illinois with middling loan size and anemic HPA may find speeds receive more of a waiver lift.

Brian Landy, CFA
blandy@santander.us
1 (646) 776-7795

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