By the Numbers
Some servicers hold onto their speed advantage
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.
Some servicers have managed to maintain faster prepayments than their peers over the last year, a clear benefit for MBS trading below par. Housing turnover and cash-out refinances drive most of the speeds in discount bonds. And it is unclear whether servicers can reliably induce borrowers to buy homes or convince borrowers to use cash-out refinances at high interest rates. But some servicers’ speeds have run consistently faster over the last year, suggesting the servicers either cater to a fast population or are particularly persuasive.
Clear differences in discount speeds
Quicken’s loans prepaid 27.5% faster than its peers’ loans over the last six months (Exhibit 1). The data show Quicken’s portfolio prepaid 5.8 CPR over that time. The “Reference” column shows how those loans would have prepaid if they had been serviced by the average servicer, and the “% ΔReference” column shows the percent difference between each servicer’s speed and each servicer’s reference speeds, and the table is sorted from faster to slower. Quicken is the fastest and largest of these servicers.
Exhibit 1. The 10 fastest large servicers from October 2022 through March 2023
Speeds for conventional 30-year MBS. % ΔReference calculated using SMM.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Consistent differences in speeds
Comparing each servicer’s performance from October 2022 through March 2023 to the performance over the prior six months shows that faster servicers tended to stay fast and slower servicers tended to stay slow (Exhibit 2). This includes the 40 largest servicers and plots the percent faster or slower over the last six months against the percent faster or slower over the six months before that. The correlation coefficient is 0.84, which shows that most servicers prepaid faster or slower by roughly the same amount. This provides more confidence that there is durability to a servicers speed advantage or disadvantage.
Exhibit 2: Servicers typically had similar prepayment behavior over the last six months and the prior six months.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
The results are similar after expanding the analysis to include smaller servicers (Exhibit 3). The prepayment behavior is somewhat noisier since many of the additional servicers are very small, but the correlation coefficient is still high at 0.676. Overall, the same pattern seen with the 40 largest servicers holds true for the expanded set—faster and slower servicers generally maintained their speed behavior across the year.
Exhibit 3. The 200 largest servicers also maintained their speed behavior over the course of the last 12 months.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.
Possible reasons for the differences
It is likely that cash-out refinancing plays a role in this behavior, since servicers can market those refinances to their customers. Although mortgage rates are high, a cash-out refinance may still be attractive for debt consolidation. Mortgage rates are typically much lower than credit card rates, and mortgage interest is tax deductible. A home equity line of credit might make more sense than a cash-out refinance, but some borrowers may not qualify for a subordinate lien. Cash-outs still accounted for roughly 11% of recent conventional issuance and about 15% of recent Ginnie Mae issuance.
Additional information about servicer prepayments can be found here and here.
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