By the Numbers

Fast Ginnie Mae speeds reflect aggressive VA refis

| February 9, 2024

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.

Ginnie Mae prepayment speeds surprised the market in January with a sharp jump higher, moving 20% faster overall due to a sharp increase in higher coupon speeds as loans refinanced. Veterans Administration loans were the primary culprit, although there was also an increase in speeds from Federal Housing Administration loans. Faster speeds in some pockets of the Ginnie Mae market were expected, and VA loans are typically very fast to refinance. But speeds jumped more than expected because originators are refinancing loans that appear to have little-to-no rate incentive. Also, compared to December, more of those borderline loans became seasoned enough to qualify for the FHA’s and VA’s streamlined refinance programs.

It appears that originators may be offering refinance loans rates that are well below the rates offered for home purchases, meaning that purchase loans are effectively in-the-money at origination. The only protection is that the FHA and VA prevent low-WALA refinancing. But speeds should jump once the seasoning requirement is met unless rates move much higher. Investors should be especially wary of VA loans with high spreads at origination, as those loans are likely to refinance after seven months if rates don’t increase. And investors should continue to prioritize FHA loans over VA loans in higher coupons for the prepayment protection. Although FHA loans did prepay faster, the speeds were much slower than for VA loans.

Speeds increased in January for FHA and VA loans, although the VA increase was much larger than the pickup in FHA loans (Exhibit 1).  The chart compares December and January speeds for FHA and VA loans in 30-year fixed rate Ginnie Mae pools. The 5.0% coupon was roughly unchanged, as were 5.5% FHA loans, but every other bucket prepaid faster. The gains were much larger for VA loans than FHA loans; historically VA loans refinance quicker than FHA loans and this month was no exception. Perhaps the most surprising thing were the pickups in the 5.5%s and 6.0%s. The loans in these pools were generally at most marginally in-the-money and were originated when mortgage rates were at similar or lower levels than today. And VA 6.5%s prepaid faster than VA 7.5%s.

Exhibit 1. Speeds increased on VA loans in pools with 5.5% coupons and higher.

Source: Ginnie Mae, Santander US Capital Markets

Mortgage rates have fallen back to levels roughly comparable to early 2023 (Exhibit 2). These mortgage rates are published by Optimal Blue using their mortgage rate lock data. There was a small period around the time of the regional bank failures when rates were higher, but otherwise were at or below current levels. Mortgage rates in the second half of the year shot higher and then fell, but most of those loans are not yet eligible to streamline refinance. The FHA requires loans to be at least six months seasoned and the VA requires seven months of seasoning.

Exhibit 2. Most loans that are eligible to streamline refi were originated when rates were not higher than today.

Source: Optimal Blue LLC, Santander US Capital Markets

The FHA and VA also impose tests to ensure that borrowers benefit from a refinance—the FHA looks at the payment reduction and the VA requires the mortgage rate to drop at least 50 bp. The FHA’s test often works out to a similar rate threshold as the VA uses, although it varies with the current rate of the loan. So many loans that have seasoned enough to refinance probably would not pass the net tangible benefit tests but are refinancing regardless. This suggests they are receiving a lower rate than the data from Optimal Blue indicates.

That is the crux of the surprise—few Ginnie Mae loans that meet the seasoning requirement were originated in a higher rate environment. Stated differently—most loans that were originated when rates were high are not seasoned enough to prepay.

Isolating just loans that have less than seven months seasoning shows that these loans prepaid slowly in December and January (Exhibit 3). The prepayment protection provided by the FHA and VA seasoning requirements is very strong, as speeds rarely exceeded 2 CPR. Speeds were comparable between FHA and VA loans.

Exhibit 3. Loans with less than seven months seasoning prepaid slowly.

Loans less than 7 months seasoned.
Source: Ginnie Mae, Santander US Capital Markets

However, speeds jumped for loans with at least seven months seasoning (Exhibit 4). This was true of all the VA loans in 5.5% coupon pools and higher, and for the FHA loans in 6.0% pools and higher. VA 5.5%s topped 15 CPR, VA 6.0%s passed 40 CPR, VA 6.5%s are approaching 80 CPR, and so on. All these speeds were significantly faster than December. Once seasoning is accounted for the VA 7.5%s prepaid faster than the VA 6.5%s—the higher of those coupons has fewer loans that meet the seasoning requirement to refinance.

Exhibit 4. Speeds jumped for loans with at least 7 months seasoning.

Loans at least 7 months seasoned.
Source: Ginnie Mae, Santander US Capital Markets

Plotting speeds against rate incentive instead of coupon shows that speeds picked up in December and January even for VA loans with nominally negative rate incentive (Exhibit 5). For example, VA loans with -25 bp rate incentive prepaid roughly 20 CPR in December and 15 CPR in January. That seems too fast to be solely due to housing turnover, especially since lower incentive buckets prepaid more slowly. Some of the prepays may be due to cash-out refinancing, but others are likely rate-and-term refinancing into rates lower than the average mortgage rate. The rate incentive in this exhibit uses Optimal Blue’s FHA and VA mortgage rates, not a conventional mortgage rate, so it is not skewed by the fact that FHA and VA rates are typically lower than conventional mortgage rates.

Exhibit 5. Even loans with no rate incentive are refinancing.

Loans at least 7 months seasoned. Only incentive buckets with at least 1,000 loans are shown.
Source: Ginnie Mae, Santander US Capital Markets

The refinancing of loans with up to 50 bp rate incentive is troubling, since those loans ought to be excluded by the VA’s net tangible benefit requirement. The speeds are too high to be caused solely by a cash-out refinance. This implies that these borrowers are receiving lower rates than the Optimal Blue index suggests. Since most production is for purchase loans the index is dominated by purchase production and the index won’t fall much if rate/term refinances are given much lower rates. The December speeds did hint at the trouble that was brewing for January, but fewer loans were at least 7 WALA so the effect on aggregate speeds was smaller.

The note rates of loans originated over the last few years show that rate/term refinances have generally been receiving lower mortgage rates than purchase loans (Exhibit 6). This gap is bigger for FHA than conventional, and bigger for VA than FHA. And the VA gap widened further in 2023, although bounced back a little recently. Some skepticism is in order, since rate/term production has been quite low. For example, roughly 1,000 VA rate/term refinances were originated each month in 2023. But given the observation on speeds it is likely that lenders have been promoting lower rates on their FHA and VA rate/term refinances and this has been drawing in business.

Exhibit 6. Rate/term refinances get lower rates than purchase loans.

Difference between monthly note rate of purchase and rate/term refinance loans. Cash-out loans are excluded. Three-month moving average.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets

Going forward, however, it is unclear that lenders will be able to keep offering low rates for refinancing as more loans season into refinance eligibility. The additional supply might cause the spread between purchase and refinance loans to narrow or lift mortgage rates for both loan types. That would help normalize speeds in cuspier pools.

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

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 © 2024 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.

The Library

Search Articles