By the Numbers
VA loans lift speeds in low coupon Ginnie Mae pools
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Over the last year, loans guaranteed by the US Department of Veterans Affairs have posted faster prepayment speeds from housing turnover than loans insured by the Federal Housing Administration. Most MBS today trade at a discount to par, and faster prepayment speeds lift returns. Investors can increase exposure to VA loans in Ginnie Mae securities by moving down in coupon, since VA borrowers typically receive lower mortgage rates than FHA borrowers. And low coupon pools that trade at the deepest discount to par benefit the most from a pickup in prepayment speeds. Prior to 2022 the situation was reversed, as FHA borrowers typically exhibited faster housing turnover than VA borrowers. Both VA and FHA loans prepaid faster than conventional loans, something that was historically true, which helps lift the value of Ginnie Mae MBS relative to conventional MBS.
VA loans prepaid faster than FHA loans and conventional loans in every large cohort originated since 2019 with a 5% coupon or lower (Exhibit 1). The gap tends to be largest in more seasoned vintages. For example, 4% 2019 VA loans prepaid nearly 15 CPR over the last 12 months, compared to roughly 9 CPR for FHA, conventional, and rural housing service loans. VA borrowers can obtain loans without making a down payment and are also allowed to roll some closing costs into the loan that don’t affect the loan-to-value ratio. The high leverage boosts the returns to the VA borrower when home prices increase more than it does for borrowers that have to make a down payment. Rural housing service loans were the slowest program in the 2022 vintage but tended to catch up to FHA loans and often surpass conventional loans in the older vintages.
Exhibit 1. Discount VA loans prepaid faster than discount FHA over the last year
Prepayment speeds from October 2022 through September 2023. Includes loans ≥12 WALA. Cohorts with at least $10 billion UPB as of September 2023 factors.
Source: Ginnie Mae, Santander US Capital Markets
The VA speed advantage carried over to more seasoned cohorts as well (Exhibit 2). VA speeds in the largest 2017 and 2018 vintage cohorts all exceeded 10 CPR, while speeds for the other three programs all fell short of that mark. The difference narrowed as seasoning increased. Conventional loans were often the slowest group in most of these cohorts, with FHA and RHS loans vying for second place.
Exhibit 2. Seasoned discount VA loans also prepaid faster than FHA last year
Prepayment speeds from October 2022 through September 2023. Includes loans ≥12 WALA. Cohorts with at least $10 billion UPB as of September 2023 factors.
Source: Ginnie Mae, Santander US Capital Markets
Investors can get exposure to VA loans by moving down-in-coupon (Exhibit 3). VA borrowers usually enjoy the benefit of a lower mortgage rate than an FHA or conventional loan originated at the same time. This means that a greater proportion of VA loans are placed into low coupon pools. For example, the 2% 2022 cohort is 78% VA loans, while the 2.5% 2022 cohort is only 55% VA, and the concentration continues to decline at higher coupons. Low coupon pools trading at the deepest discount to par benefit the most from the faster prepayment speeds that VA loans are bringing.
Exhibit 3. Lower coupon pools have higher VA concentrations.
Cohorts with at least $5 billion UPB as of October 2023 factors.
Source: Ginnie Mae, Santander US Capital Markets
However, it is worth noting that historically FHA loans displayed faster discount prepayment speeds than VA loans (Exhibit 4). This chart includes only loans that are at least 50 bp out-of-the-money to refinance into a new loan of the same type—FHA to FHA, VA to VA, and so on. FHA loans were the fastest group from 2014 through 2021. The chart shows the total CPR, including buyouts, since those prepayments are not reported in the conventional loan-level data. FHA loans often have higher default and buyout rates, buoying prepayment speeds. However, the speed advantage remains after removing buyouts for the FHA loans, even during 2020 when buyouts spiked due to the economic shutdown caused by Covid-19.
Exhibit 4. Prior to 2022, FHA loans exhibited faster turnover than VA loans.
Loans at least 50 bp out-of-the-money to refinance, compared to the current production rate for that government loan program. Includes loans ≥12 WALA. Speeds through September 2023.
Source: Ginnie Mae, Santander US Capital Markets
VA loans turned the tables in 2022 and 2023. One possible reason is that the VA borrower typically has a better credit score than an FHA borrower and is more likely to be able to relocate if necessary. And the VA borrower benefits more from home price appreciation since the loan requires no down payment. While both borrower types tend to more move often than conventional borrowers, the VA borrower may face more forced moves since some of those borrowers are active servicemembers and may be relocated. Some FHA borrowers may be more affected than VA borrowers by falling home affordability from higher mortgage rates. And FHA borrowers that defaulted on mortgage payments during the pandemic may face additional lock-in from the assistance they received from the government to stay in their homes.
Going forward, FHA speeds could increase if the economy moves into a recession and causes more FHA borrowers to default. The FHA has a new program to assist discount borrowers that default on their mortgage payments, but its effectiveness has not yet been proven.
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