By the Numbers
Specified pool value across the coupon stack
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.
MBS investors tend to undervalue the advantage of loan balance or a Texas address in today’s lower coupons. They then tend to undervalue Florida loans and FICO in higher coupons. Accounts managing for total returns should find good value in matching the right spec to the right coupon.
Mispricing of loan balance across coupons
Pools with maximum loan sizes no more than $175,000 are currently trading at wide OASs to TBA in low coupons, but much of the advantage fades in high coupons (Exhibit 1). Each point on the chart represents a cohort of 30-year fixed rate loans of a specific coupon, vintage, and loan balance pool type. These cohorts are all included in the Bloomberg MBS index. The OAS difference is plotted against the weighted average coupon of the loans in that cohort. At the lowest WACs the low loan balance cohorts are current roughly 30 bp to 40 bp wider than the corresponding TBA. But at the highest coupons, the difference has dropped to nearly zero in some cohorts.
Exhibit 1. Low loan balance pools are trading at wide OASs in low coupons.
Source: Bloomberg, Santander US Capital Markets
Low loan balance pools typically refinance slower than TBA when interest rates are low but prepay faster than TBA from housing turnover when interest rates are high. In fact, in lower coupons the loan balance pools so far this year have been paying faster than non-spec pools for the same vintage and faster than TBA. The wide option-adjusted spreads suggest that the market is undervaluing the extension protection from these pools.
Pools with maximum loan sizes of $200,000 and $225,000 also widen at low coupons (Exhibit 2). However, the degree of widening is lower. Most cohorts trade less than 20 bp wider than TBA, compared to up to 40 bp wider in the lower balance cohorts. The gap narrows further in high coupons and is comparable to the lower balance cohorts.
Exhibit 2. Max $200,000 and Max $225,000 pools also have wide OASs in low coupons.
Source: Bloomberg, Santander US Capital Markets
The low coupon advantage almost vanishes for pools with maximum loan sizes of $250,000 and $275,000 (Exhibit 3). These pools typically trade between 5 bp and 15 bp wider than TBA pools, so there is a spread advantage, but it hardly varies across coupons. There is not a clear value winner in any coupon in these pool types.
Exhibit 3. Max $250,000 and $275,000 pools do not widen at low coupons.
Source: Bloomberg, Santander US Capital Markets
Valuation across LTV
Pools with high LTVs have a small option-adjusted spread advantage in lower coupons, but it drops close to zero in high coupons (Exhibit 4). These pools usually turnover faster than TBA, which would benefit low coupons, but investors may be concerned that borrowers have such strong lock-in that the speed advantage won’t materialize. Speeds in LTV pools this year have come in faster than non-spec pools of the same vintage and faster than TBA. But the small OAS advantage suggests a lot of the speed advantage is priced in. The high coupons are dominated by relatively young loans that did not benefit from the historic home price appreciation from 2020 into mid-2022. Some of these borrowers may even be locked out of a refinance if their home values dropped. There has been a lot of interest in those pools this year, and production has been higher in 2023 than 2022, but the demand for these pools appears to be keeping spreads in-line.
Exhibit 4. Option-adjusted spread difference for high LTV pools.
Source: Bloomberg, Santander US Capital Markets
Flat valuations across investor properties
Pools backed by loans for investment properties and second homes are trading at similar option-adjusted spreads as TBA pools across the coupon stack (Exhibit 5). Most cohorts are less than 10 bp wider than TBA and many trade at the same or tighter OAS, so none of the coupons stand out as providing a lot of value in this pool type.
Exhibit 5. Option-adjusted spread difference for Investor and 2nd Home pools.
Source: Bloomberg, Santander US Capital Markets
Wider than a 10-gallon hat
Pools backed by loans from Texas are also trading at wide option-adjusted spreads in low coupons (Exhibit 6). Texas has had a robust housing market and experienced in-migration of people, which tends to push housing activity higher. Investors may be undervaluing the possibility that discount Texas pools will post faster speeds than other pool types. So far this year, Texas pools tend to pay faster than non-spec pools of the same vintage and faster than TBA. These pools are available at relatively low pay-ups, which lowers the risk of owning these pools for some investors.
Exhibit 6. Option-adjusted spread difference for 100% Texas pools.
Source: Bloomberg, Santander US Capital Markets
Valuations across FICO
Pools of borrowers with low credit scores, however, trade at wider option-adjusted spreads in higher coupons (Exhibit 6). These borrowers typically turnover faster as credit curing allows them to access cheaper financing and they often need a larger home. In a weak economy, the prospect of faster default rates also can contribute to extension protection in these pools. However, these borrowers tend to be less likely to take advantage of refinance opportunities, which provides some prepayment protection in higher coupons. The market appears to value the extension protection more than the refinance protection in these pools.
Exhibit 7. Option-adjusted spread difference for low FICO pools.
Source: Bloomberg, Santander US Capital Markets
Valuations across Florida and New York
Pools of entirely Florida loans widen significantly at higher coupons (Exhibit 8). Florida loans benefit from a strong housing market and heavy home price appreciation, which should boost turnover speeds on lower coupon pools. However, the borrowers face high mortgage taxes, which can slow refinance speeds and provide prepayment protection. The spreads suggest that these pools are also a cheap source of prepay protection in higher coupon pools.
Exhibit 8. Option-adjusted spread difference 100% Florida pools.
Source: Bloomberg, Santander US Capital Markets
Pools backed by New York loans also trade at a wider spread to TBA in higher coupons, but the advantage is smaller than for Florida and low FICO pools (Exhibit 9). New York borrowers pay higher mortgage taxes than Florida borrowers, which provide prepayment protection, but a tepid housing market prevents these pools from providing extension protection. This prepayment behavior is better known than Florida pools, which may account for the tighter OASs in high coupons. And in low coupons, many cohorts are trading at tighter OASs than TBA, suggesting investors think these pools will prepay faster than Bloomberg’s prepayment model expects.
Exhibit 9. Option-adjusted spreads across coupons for New York.
Source: Bloomberg, Santander US Capital Markets
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.
