By the Numbers
A steady fall before the plunge in GNPL prepayment 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.
Prepayments in Ginnie Mae project loans peaked in November last year and have fallen steadily for all loans that still have penalties attached. But for loans with no remaining penalties, speeds have accelerated dramatically over the past few months. The rise in rates since March has likely added another 50 bp to 75 bp to average project loan commitment rates, pushing more of the universe out-of-the-money to refinance. This will probably push prepay speeds from 10 CRR closer to 2 CRR for a while, but over time loans originated before pandemic with moderate penalties attached may prepay steadily in the 5 CRR to 10 CRR range, benefiting IO investors.
Ginnie Mae project loans that still have any prepayment penalty attached, matched or exceeded peak prepay speeds in November 2021 and have been falling steadily since then across all penalty buckets (Exhibit 1). Specifically:
- Speeds for loans with 9 or more penalty points still attached fell to 3.1 (3-month CRR, post-lockout)
- Prepay speeds for loans in the 7- to 8-point penalty bucket remained somewhat elevated at 11.8 CRR
- While loans with 1 to 6 points of penalty prepaid in the 8 CRR to 9 CRR range over the last three months
The dramatic exception has been project loans with no prepay penalty remaining, which, as of March, have accelerated to prepay at 55 CRR over the last three months. Loans with no penalty remaining are typically 10 or more years into the 30-year term. These multifamily borrowers benefited from record property price appreciation over the past decade. As rates began to rise over the last several months, prepay speeds on zero penalty loans accelerated sharply, as many borrowers finally refinanced or sold their properties to extract equity.
Exhibit 1: Voluntary prepayments by penalty amount (3-month CRR, post-lockout)
Note: Prepay speeds through March 2022.
Source: Ginnie Mae, Amherst Pierpont Santander
Average project loan commitment rates barely budged the last few months despite the sell-off, narrowing the spread between GNPL rates and the 10-year Treasury rate (Exhibit 2). This has left new issue GNPL multifamily rates in the same neighborhood as average single-family current coupon rates. However, the GNPL rate data is based on loans that have been securitized into deals through March. Some higher coupon loans may have been held back to pool into newer deals with higher WACs as dealers clean up their inventory; as this happens average project loan commitment rates (PLC rates) are expected to rise and spreads will likely re-widen from 60 bp back towards 100 bp. Already the monthly average 10-year Treasury rate at loan origination will print 50 to 100 bp higher when April and May speeds come out, and PLC rates are expected to sharply increase.
Exhibit 2: GNPL commitment rate history vs 10-year Treasury and GN single-family current coupon
Note: Data through March 2022.
Source: Ginnie Mae, Amherst Pierpont Santander
Over the next few months and these rate levels, much of the universe of agency CMBS will be out-of-the-money to refinance. Historical S-curves indicate that prepay speeds would be expected to drop to 2 CPR (Exhibit 3). Recent analysis suggests that agency multifamily loans originated prior to mid-2020 that are out-of-the-money to refinance could still experience elevated prepay speeds averaging 5 to 10 CPR over time, see High property price appreciation could lift prepayments in OTM loans.
Exhibit 3: GNPL S-curve by rate incentive (CRR, post-lockout)
Note: Average voluntary prepay speeds for loans issued prior to 2020.
Source: Ginnie Mae, Amherst Pierpont Santander
Prepayment speeds in agency multifamily floating rate loans have accelerated dramatically as rates have sold off. Freddie Mac K-F deals had speeds effectively near zero for much of the first three quarters of 2021. Speeds began to tick higher in September then ramped up very fast starting in October 2021, with deals seasoned 12 months or more often having speeds from 25 to 65 CPR during February 2022. These speeds are expected to increase when the March report is released, before likely dropping back in April as higher fixed rates reduce demand to refinance.
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