By the Numbers

Slower speeds for first-time buyers

Brian Landy, CFA | November 10, 2023

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.

First-time homebuyers prepay their loans more slowly than repeat buyers, something that provides prepayment protection to MBS investors when mortgage rates are low and that extends MBS cash flows when rates are high. Investors in interest-only MBS especially should look for bonds with high concentrations of first-time buyers since slower speeds lift returns for the bonds whether rates are high or low. First-time buyers account for more than 75% of new FHA purchase loans and are a growing share of conventional origination. Slower prepayments occur regardless of credit score, loan-to-value ratio, or loan size. One exception are loans guaranteed by the Department of Veterans Affairs, which may have slightly faster turnover after a few years of seasoning.

Loans insured by the Federal Housing Administration (FHA) and Rural Housing Service (RHS) are heavily used by first-time buyers, since these loans require low down payments and don’t charge higher fees to borrowers with weaker credit histories (Exhibit 1). Roughly 75% of FHA purchase loans are made to first-time buyers, up from about 65% in 2014. Almost 85% of RHS purchase loans were made to first-time buyers in 2023, the highest level in 10 years. Conventional and Veterans Affairs (VA) loans are less frequently used by first-time buyers. But the share of new buyers has increased in the conventional program to 50% in 2023 from 41% in 2014. And since most loans originated today are used to purchase a home, first-time buyers have become a significant share of total production.

Exhibit 1. First-time home buyers are most prevalent in the FHA and RHS programs.

First-time home buyer percentage of owner-occupied purchase loans.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Loans made to first-time buyers have different collateral characteristics than those made to repeat buyers (Exhibit 2). On average the first-time buyer pays a roughly 5 bp to 10 bp higher mortgage rate than a repeat buyer. Although none of the government agencies charge a fee to first-time buyers, it is possible that lenders apply a credit overlay if they perceive new buyers to be higher risk. First-time buyers tend to buy smaller homes and have lower credit scores. Conventional first-time buyers tend to put less money down than conventional repeat buyers. Most government borrowers make only the minimum down payment required by each program, so there is little difference in loan-to-value ratios between first-time and repeat buyers using FHA, VA and RHS loans.

Exhibit 2. First-time buyers tend to have smaller loans, lower credit scores, higher LTVs, and slightly higher rates.

Data for owner-occupied purchase loans originated in 2023.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Conventional loans (Fannie Mae and Freddie Mac)

First-time buyers with conventional loans tend to prepay more slowly than repeat buyers when mortgage rates are high (Exhibit 3). The charts compare prepayment speeds over the last year for various discount cohorts originated in 2020 and 2021, all with original loan-to-value ratios no higher than 80%. The cohorts are also grouped by loan size and credit score, to control for the typical collateral characteristics of loans to first-time buyers and repeat buyers. Without exception, the first-time buyers prepaid slower than the corresponding repeat buyers.

Exhibit 3. Conventional first-time buyers with original LTV≤80 turnover slower.

Performance from November 2022 through October 2023.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets

First-time buyers with original LTV over 80% also prepaid slower than comparable repeat buyers (Exhibit 4). This was true for every large discount cohort originated in 2020 and 2021. Regardless of LTV, loan size, or credit score—the first-time home buyers did not move as often as the repeat buyers.

Exhibit 4. Conventional first-time buyers with original LTV>80 turnover slower.

Performance from November 2022 through October 2023.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets

First-time home buyers also tend to refinance more slowly than repeat buyers (Exhibit 5). These graphs show prepayment speeds during the height of the pandemic refinance wave—April 2020 through March 2021–for loans originated in 2018 and 2019. All these loans were at most 80% LTV at origination. Once again, across every cohort, the first-time buyers prepaid slower than the repeat buyers.

Exhibit 5. Conventional first-time buyers with original LTV≤80 refinance slower.

Performance from April 2020 through March 2021.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets

The story remains the same for loans originated with loan-to-value ratios over 80% (Exhibit 6). First-time home buyers appear to add prepayment protection relative to repeat buyers, regardless of LTV, loan size, or credit score.

Exhibit 6. Conventional first-time buyers with original LTV>80 refinance slower.

Performance from April 2020 through March 2021.
Source: Fannie Mae, Freddie Mac, Santander US

Capital Markets

Federal Housing Administration loans (FHA)

The relative behavior between first-time buyers and repeat buyers carries over to loans insured by the Federal Housing Administration (Exhibit 7). These charts show prepayment speeds over the last year for discount cohorts originated in 2020 and 2021. First-time buyers prepaid more slowly than repeat buyers. However, FHA loans overall tend to turnover faster than conventional loans, despite the higher concentration of first-time buyers in the FHA program. These charts include all borrowers regardless of LTV, since most FHA borrowers put down the minimum allowed down payment.

Exhibit 7. FHA first-time buyers turnover slower.

Performance from November 2022 through October 2023.
Source: Ginnie Mae, Santander US Capital Markets

Continuing the theme, FHA first-time buyers also refinance more slowly than FHA repeat buyers (Exhibit 8). All but one cohort shows slower speeds from the first-time buyers, and the one exception—5.5%s 2018, loan size under $200,000, FICO<700—has a tiny difference.

Exhibit 8. FHA first-time buyers refinance slower.

Performance from April 2020 through March 2021.
Source: Ginnie Mae, Santander US Capital Markets

Veterans Affairs loans (VA)

Loans guaranteed by the Department of Veterans Affairs, however, show some different behavior than FHA and conventional loans (Exhibit 9). These graphs show speeds of discount cohorts over the last year for various cohorts, for the same loan size and credit score buckets. Like FHA, this does not differentiate by LTV since most VA borrowers do not make a down payment. And first-time buyers in most of the 2020 vintage cohorts prepaid faster than the repeat buyers. Only the low balance, low FICO, bucket does not show this. But the 2021 vintage cohorts all have slower speeds from the first-time buyers. So it could be that the disadvantage of first-time VA loans dissipates as the loans season.

Exhibit 9. VA first-time buyers turnover slower initially, but turnover faster after a few years of seasoning.

Performance from November 2022 through October 2023.
Source: Ginnie Mae, Santander US Capital Markets

The prepay protection of first-time buyers does carry over to the VA program (Exhibit 10). Once again, in every cohort the first-time buyers were slower than the comparable repeat buyers.

Exhibit 10. VA first-time buyers refinance slower.

Performance from April 2020 through March 2021.
Source: Ginnie Mae, Santander US Capital Markets

Rural Housing Service loans (RHS)

The USDA’s Rural Housing Service program is smaller than the FHA or VA but is only available to borrowers below area median thresholds so tends to be more heavily used by new home buyers. These loans show the same behavior as FHA and conventional—slower speeds in turnover and refinance environments than the repeat buyers.

Exhibit 11. RHS first-time buyers turnover slower.

Performance from November 2022 through October 2023.
Source: Ginnie Mae, Santander US Capital Markets

Exhibit 12. RHS first-time buyers refinance slower.

Performance from April 2020 through March 2021.
Source: Ginnie Mae, Santander US Capital Markets

With very limited exceptions, first-time home buyers prepaid more slowly than their repeat buyer counterparts. This is a mixed result for pool buyers—the prepay protection is a positive when rates are low, but the extension is a negative when rates are high. However, buyers of interest-only bonds backed by MBS benefit in either situation. Those bonds always have higher returns if prepayment speeds are slower, so those investors should look for bonds with high shares of first-time buyers to enhance returns.

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

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