By the Numbers

Fast MBS servicers stay fast in a discount market

| August 19, 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.

Servicers with a history of fast prepayment speeds have continued to prepay faster than their peers despite fading refinance volume. However, the magnitude of a servicer’s effect on prepayment speeds is lower than it was during the recent refinance wave. Most MBS are trading at a discount, which means the faster servicers should offer some extension protection and lift MBS value. It was unclear whether a fast refinance servicer would remain fast in a turnover environment. While that has held true so far it bears close monitoring over the coming months, and there are some exceptions.

Servicer performance during 2021 was a strong predictor of servicer performance over the last three months, May to July 2022 (Exhibit 1). Each servicer’s prepayment speeds are compared to the prepayment speeds of a group of loans with comparable collateral characteristics but serviced by all agency servicers. The servicer’s effect on speeds is the percentage faster or slower its loans prepaid than the reference group of loans. This process controls for collateral characteristics that can vary across servicers such as note rate, loan age, loan size, credit score, and LTV ratio. The scoring was calculated for the heavy refinance environment in 2021 and the predominantly turnover environment from May to July 2022.

Exhibit 1: Servicers generally maintained their relative prepayment behavior

Note: Data for larger servicers of agency MBS.
Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Most servicers that prepaid quickly in 2021 were also fast in 2022. The fastest servicers in 2021—Quicken, loanDepot.com and Freedom Mortgage—stayed fastest as the market moved to a turnover environment, Overall, the servicer effect was more muted in 2022. This is illustrated in the chart by the blue dashed line, which is flatter than the red line. A notable exception is Provident Funding. Provident loans prepaid 45% faster than its peers in 2021, but prepaid 13% slower over the last three months. Podium Mortgage slowed significantly but stayed slightly fast, falling to 5% from 31%.

Expanding the analysis to include smaller servicers confirms the same trend holds, although the relationship is somewhat noisier (Exhibit 2). For example, the correlation is 89% for the 40 largest servicers but falls to 80% when including smaller servicers. The regression line is also a little flatter when including smaller servicers.

Exhibit 2: Smaller servicers prepayment behavior was also correlated

Note: Data for larger and small servicers of agency MBS.
Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Exhibit 3: The 10 fastest large servicers from May through July 2022

Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Brian Landy, CFA
blandy@apsec.com
1 (646) 776-7795

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