By the Numbers
The influences behind slower Ginnie Mae RG speeds
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.
Ginnie Mae RG pools have traded at substantial premiums to TBA over the last few months as investors look for and get slower prepayments and better convexity. The initial prepayment results show that better RG performance is partly explained by the pools having mostly FHA loans and smaller loan balances. But the prepayment advantage persists after controlling for key collateral attributes, suggesting that the past delinquencies on these loans may be suppressing speeds further. On average, RG loans have prepaid 20.5% slower than non-RG loans with matching characteristics.
As a refresher, RG pools consist of loans delinquent during the Covid-19 pandemic and subsequently bought out by their servicer. The loans subsequently cure after the buyout, typically with the servicer deferring the delinquent balance at no interest until the loan is pays off or matures. Investors have expected these pools to prepay slower than TBA pools, so the pools have been selling at a pay-up over TBA.
The loans in RG pools typically have smaller balances, are more seasoned, and are FHA-insured. Each of those characteristics should lead to slower prepayment speeds compared to their cohort or to TBA pools. These borrowers might prepay even more slowly since they were recently delinquent. However, there is no relevant historical data to support that claim, and these FHA borrowers can use a streamlined refinance despite their recent delinquencies. An in-depth discussion of post-forbearance Ginnie Mae loans and RG pools can be found here.
Comparing prepayments in RG pools over the last three months to two different groups of loans pulled from Ginnie Mae multiple issuer and custom pools highlights the RG differences (Exhibit 1). The first comparison, called the “reference”, is the 3-month CPR for groups of loans that have the same collateral characteristics as the corresponding group of RG loans. The reference speed controls for WAC, WALA, FHA MIP, loan size, government agency, state, and servicer. This adapts the methodology used for Amherst Pierpont’s Servicer Prepayment Rankings and quantifies how much faster or slower loans in RG pools prepaid compared to loans in other Ginnie Mae pools. The second comparison, called the “cohort”, is simply the average prepayment speed of all Ginnie Mae loans in multiple issuer pools for each combination of coupon and vintage. The cohort speed does not control for other differences in collateral characteristics between RG and non-RG pools.
Exhibit 1. RG pool prepayments have been slower than similar non-RG loans
The reference loans have similar collateral characteristics to the RG loans in each coupon/vintage bucket and are sourced from Ginnie Mae multiple issuer and custom pools. The cohort includes all loans in Ginnie Mae multiple issuer pools matching that coupon and vintage.
Source: Ginnie Mae, eMBS, Amherst Pierpont Securities
The RG loans prepaid slower than the reference loans in all but one cohort. The typical difference ranged from 15% to 35% slower. Only one group, the 4.0%s 2011, prepaid faster. On average RG loans prepaid 20.5% slower than the reference cohort. This suggests that RG pools do offer some additional refinance protection above that conferred by loan characteristics, although it is too early to judge how long this benefit will persist.
The overall cohort speeds were faster than the reference speeds in all but one case. That difference shows how much slower RG pools should be due beneficial characteristics like higher FHA percentage. Cohort speeds tend to be fastest on newer vintages because those pools contain a lot of VA loans. Therefore, the gap between RG and cohort is generally widest on newer vintages. For example, the 4.0% 2019 cohort prepaid at 55.1 CPR, compared to 42.5 CPR for the reference and 30.4 CPR for the RG pools.
It is encouraging for investors that the RG loans issued so far have prepaid slower than comparable non-RG loans, although it is too early to know how long that difference will last. But even if these loans prepay at the same speed as their reference loans they should still offer better convexity than TBA.
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