By the Numbers

Look for more rapid VA speeds to erode Ginnie Mae TBA

| March 15, 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.

Loans guaranteed by the Department of Veterans Affairs typically offer lower mortgage rates than conventional loans or loans insured by the Federal Housing Administration. Recently a gap has opened between VA purchase loans and VA streamlined refinances—a VA purchase loan may receive a rate 50 bp lower than a conventional loan, and a VA refinance may receive a rate as much as 50 bp lower than a VA purchase. This means many VA purchase loans are effectively in-the-money at origination, and only the VA’s seasoning requirement prevents an immediate refinance. Expect VA speeds in new pools to spike once the loans have seasoned seven months, even if mortgage rates hold steady, and for the quality of Ginnie Mae TBA to erode.

Most VA rate and term refinances originated so far in 2024 received a note rate below 6.5%—to be precise, 95% of rate and term refinances came in below that mark (Exhibit 1). These refinances are almost exclusively originated using the VA’s Interest Rate Reduction Refinance Loan (IRRRL) program.  However, 46% of purchase loans and 50% of cash-out refinances received a note rate above 6.5%. VA borrowers are very quick to refinance when possible, so expect speeds on these loans to jump later in the year unless rates climb much higher.

Exhibit 1. New VA rate, term refis receive much lower rates than other VA loans.

VA loans originated from January 2024 through March 2024, as of March 13. Each bucket is labeled with the minimum rate allowed in the bucket.
Source: Ginnie Mae, Santander US Capital Markets

The note rate for FHA rate and term refinances is a little lower than other FHA loan types, but not to the same extent as VA loans (Exhibit 2). The FHA rate and term distribution spikes in the 6.0% to 6.5% bucket and rate and term production was lower than other loan types in the 7% and higher buckets. Roughly 64% of FHA rate and term refinances received a rate below 6.5%, compared to 51% of cash-out refinances and 47% of purchase loans. This suggests most FHA loans will not receive the same refinance opportunities as VA loans might later this year. And even when presented with the same refinance opportunity an FHA borrower prepays much slower than a VA borrower, so this difference should have little effect on FHA speeds.

VA loans are more common in Ginnie Mae multi-issuer pools, and the recent spike in prepayments has generated more interest in creating custom pools that contain no VA collateral. This will worsen the characteristics of new multi-issuer pools. And many of the VA loans that have higher note rates were originated in the second half of 2023, so have not seasoned enough to refinance. Speeds on those multi pools should accelerate over the coming months as those loans season.

Exhibit 2. FHA rate, term refinances have note rates closer to other FHA loans.

FHA loans originated from January 2024 through March 2024, as of March 13. Each bucket is labeled with the minimum rate allowed in the bucket.
Source: Ginnie Mae, Santander US Capital Markets.

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

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