By the Numbers
Muted impact of agency loan limits on jumbo PLS 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.
A likely 20% jump in Fannie Mae and Freddie Mac loan limits should lift prepayments in prime jumbo private-label MBS more from lower frictions in agency refinancing than from lower agency primary rates. Except for 2020, loans of similar size and type in agency and private-label MBS have prepaid in recent years at only marginally different rates. Shifting the agency loan limit up and capturing more loans now in private trusts should not change that.
Breaking down drivers of prepayments
The most pronounced driver of prepayment rates in prime private-label securitizations is loan size, and the effect of loan size on prepayment rates appears poised to rise next year as GSE loan limits may rise by close to 20% for both conforming and jumbo conforming loans. While the potential impact of new conforming limits will be felt by a large population of loans in private trusts, the subsequent impact on prepayment rates may be relatively muted. Last year, a near stop in the private-label market led to a substantial decoupling of prepayment rates between jumbo conforming and non-conforming loan. The frictions to refinancing non-conforming loans became far more pronounced, driving prepayment rates on conforming loans substantially higher than non-conforming ones given the same amount of refinancing incentive despite the incremental savings associated with refinancing the larger balance.
Assuming 50 bp of refinancing incentive, owner-occupied loans with balances greater than roughly $550,000 in agency pools prepaid roughly in-line with those in private-label trusts in 2019, with agency pools paying 4 CPR faster than those in private-label trusts. Last year that difference widened out to nearly 30 CPR and has subsequently normalized to the 4 CPR disparity observed in 2019 this year. The obvious caveat here is that while loan balances in GSE pools are capped at the jumbo conforming limit for these observations, the private-label ones are not, so despite potentially substantially higher loan balances in private-label trusts, the loans prepaid slower albeit in varying degrees across observation years (Exhibit 1).
Exhibit 1: Speeds between jumbo conforming and non-conforming have converged
Source: eMBS, CoreLogic, Intex, Amherst Pierpont
The convergence in speeds this year may be in part be driven by the growing disparity between the average balance of jumbo conforming and non-conforming loans with comparable refinancing incentive. Looking at loans with 50 bp of refinancing incentive across the three observation years shows a steady increase in the difference between jumbo conforming and non-conforming balances which should in turn increase private label borrowers’ incentive to refinance their loans. In 2019, the difference between agency high balance and private label loans with 50 bps of refinancing incentive was just over $140,000. That difference grew to nearly $225,000 this year and may be a factor in the convergence between agency high balance and non-conforming speeds as larger savings in terms of nominal dollars given the same amount of refinancing incentive have likely spurred increased refinancing activity among non-conforming borrowers despite greater friction to refinancing higher balance loans. (Exhibit 2)
Exhibit 2: Higher PLS loan balances may be driving a convergence in speeds
Source: eMBS, CoreLogic, Intex, Amherst Pierpont
Risk to faster speeds associated with conforming balance loans across the universe of PLS trusts is by no means uniform. It seems likely that originators will look to target newly conforming loans in private label trusts to be refinanced against the backdrop of higher conforming limits next year, assuming there is adequate rate incentive for those borrowers. Trusts backed by seasoned loans that amortized down below conforming limits saw a spike in prepayment rates last year as loans that could be refinanced into agency execution gained increased focus from originators in the absence of alternate private label channels.
Where available, county level zip code data was used to determine whether loans in private label trusts would fall under either conforming or agency high-cost limits assuming a 19% increase in those balances next year. Based on this methodology anywhere from 0% to nearly 40% of collateral backing certain private label trusts may be GSE eligible next year. (Exhibit 3)
Exhibit 3: Estimating the amount of newly conforming loans in PLS trusts
Source: CoreLogic, Intex, Amherst Pierpont
Deals with larger concentrations of newly conforming balance loans appear to be mostly concentrated in more recent vintages. This is likely a function of the fact that more seasoned trusts have already experienced significant refinancing activity on lower balance loans in the wake of the pandemic, leaving disproportionately larger amounts of higher balance, non-conforming loans. However, it is worth noting that many of these deals with higher concentrations of newly conforming loans were issued last year and this year against the backdrop of historically low interest rates and may have limited amounts of refinancing incentive despite larger stores of conforming loans.
Determining what the impact on prepayment rates from the increase in conforming balances is somewhat of a tricky exercise. An analysis of select private label transactions suggests that 3-moth prepayment rates may rise by 5 to 15 CPR for certain deals. The rise in prepayment rates would be mainly attributable to the fact the newly GSE eligible loans could be refinanced with PIW waivers in lieu of an appraisal. However, depressed prepayment rates observed across non-conforming loans last year may be distorting, and to some degree, overstating the value of PIW waivers as a contributor to faster conforming speeds. Ultimately, it appears rate incentive, or the lack there of, should trump agency eligibility in terms driving prepayments on loans in private label trusts going forward.
Prepayment highlights of October remittance reports
Some observations on this month’s prepayments across recently issued prime deals:
- Speeds on 2021 vintage deals across prime jumbo and prime investor were relatively muted
- More seasoned trusts whose loans are further up the WALA ramp showed elevated prepayments despite the presence of higher rates. However, this may be the tail end of a pipeline of refinances of these loans and speeds may subsequently slow if higher rates prevail
- Deals backed by higher WAC investor loans exhibited comparable prepayment rates to those backed by lower WAC collateral, likely a function of higher WAC deals having lower average loan sizes
- Benchmarking prepayment rates across agency eligible investor loans to comparable agency pools is somewhat challenging as agency pools with comparable WACs, loan sizes and seasoning tend to be low-loan-count and can exhibit relatively idiosyncratic prepayments
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
