By the Numbers

Assessing prepayment and default risk of PLS servicers

| July 15, 2022

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.

The agency MBS market has long recognized that a servicer’s business practices influence prepayment speeds, and pools from different servicers trade at different prices. Amherst Pierpont’s monthly agency servicer prepayment rankings help identify fast and slow servicers. The same approach applies to the effect servicers have on the prepayment speeds, delinquency rates and value of private-label MBS. Analysis of PLS shows that not all servicers were created, or, at least operate, equally.

The PLS prepayment and default ranking reports can be found at the APS Portfolio Strategy website in the Library under APS Reports. There are reports that rank PLS servicers by prepayments and delinquencies. There are also reports that rank PLS shelves by prepayments and delinquencies.

Measuring servicer prepayment risk

Directly comparing the prepayment speeds of servicers can be misleading. A servicer’s business might be concentrated in a state with a higher jumbo conforming limit, so its non-agency business has a higher average loan size than a servicer that focuses on states without any high-cost areas. It would be unfair to directly compare those two servicers’ speeds without accounting for the expected prepayment difference from loan size. Similar issues can arise around note rate, loan age, and other collateral attributes. Product type also matters—for example, a non-QM loan might prepay differently than a jumbo loan.

A good measurement of a servicer’s effect on prepayment speeds needs to control for collateral characteristics. Amherst Pierpont’s PLS servicer rankings calculate two prepayment speeds for each servicer—its actual prepayment speed (“CPR”) and a reference speed (“Ref”) that controls for differences in collateral characteristics (Exhibit 1). The reference speed is calculated using the actual prepayment speeds across the entire universe of prime jumbo prepayment speeds but is adjusted to match that servicer’s portfolio composition. That explains why the reference speed is faster for some servicers and slower for others—it encapsulates the expected prepayment speed of that servicer’s loans.

Exhibit 1. Prime jumbo servicer prepayment ranking

As of June 2022 remittances, for a 3-month horizon.
Source: CoreLogic, Amherst Pierpont Securities

The column headed “%ΔRef” shows how much faster, or slower, a servicer’s loans prepaid than expected. This is the effect a servicer has on prepayments after controlling for collateral characteristics. The servicers are sorted by this column, which is highlighted. For example, PennyMac’s loans prepaid at 8.6 CPR, which is 4.5% faster than the expected 8.3 CPR. The column is calculated using SMM, not CPR, because using SMM is more accurate.

This snapshot shows that loanDepot’s loans prepaid 9.9% faster than expected and is one of the faster servicers in the report. On the other hand, Chase is closer to neutral, only 2.2% faster than reference. United Shore was also close to neutral despite a reputation for fast prepayment speeds in agency MBS. However, its agency speeds have moderated over the last year.

Ranking servicers by delinquency rates

A comparable report is also available that ranks servicers by the percentage of their portfolio that is at least 60 days delinquent (Exhibit 2). The table shows delinquency rates at the end of 2020 when many loans were not paying while in COVID-19 forbearance. For example, 4.9% of Quicken’s servicing in prime jumbo deals were at least 60-days delinquent at the end of 2020. That was 23.2% greater than the expected delinquency rate of 3.9%.

Exhibit 2. Prime jumbo servicer delinquency rate ranking

As of January 2021 remittances, for a 3-month horizon.
Source: CoreLogic, Amherst Pierpont Securities

Shelf reports and other notes

Reports are also available that rank different shelves by prepayments and defaults. The loan types covered include:

  • PLS: prime jumbo, investor, and expanded prime
  • Non-QM: bank statement, DSCR/asset depletion
  • Seasoned RPL

Methodology

The reference metric—speed or delinquency rate—is calculated by grouping loans based on loan type, note rate, loan age, loan size, credit score, LTV, SATO, state, and performance month. Each loan in a servicer’s portfolio is assigned a speed from the appropriate reference bucket, and the weighted average actual and reference speed is calculated for that servicer.

A separate write-up for the agency report includes a demonstration of the methodology and how it is calculated. The example is simplified but accurately shows the process used to generate the rankings. It is comparable to using a non-parametric model with interactions.

The full report ranks servicers over the last 3-, 6-, and 12-month horizons. With larger servicers this can help show if there has been a trend in behavior. For smaller servicers using a longer horizon minimizes noise from small sample size. Within each horizon the servicer closest to neutral is highlighted. A version of the report is also available that ranks deal shelves instead of servicer using the same methodology.

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

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 © 2023 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.

The Library

Search Articles