By the Numbers

A hot housing market could boost MBS negative convexity

| October 1, 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.

Large increases in home prices over the last year should make more loans eligible for Fannie Mae, Freddie Mac and Ginnie Mae MBS next year, boosting prepayment risk in a significant share of current prime jumbo 2.0 private MBS. Each agency can only guarantee loans below a certain size, known as the conforming limit. This limit is linked to home prices and adjusted annually. The agencies can guarantee even larger loans in certain geographic areas. The latest CoreLogic data shows home prices up 19.7% nationally year-over-year. If the FHFA price index used to set the conforming limit matches CoreLogic, it could push the limit from $548,250 currently to $655,000 next year. Roughly 15% of the balance in current prime jumbo 2.0 deals would become eligible for agency pools under the higher limit. In high-cost areas, the conforming limit could go even higher. If all current prime jumbo 2.0 loans were located in high-cost areas, up to 33% could become eligible for agency pools. This could increase prepayment speeds in the private deals since many loans may be able to take advantage of typically lower agency loan rates. Investors in agency jumbo conforming pools might also face faster prepayment speeds from loans that fall below the new indexed limit. Agency TBA pools should become more negatively convex as larger loans are placed into these pools. This should push down the quality of the 2022 vintage compared to earlier vintages and increase the value of specified pools. The CoreLogic report is here.

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

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