By the Numbers

Credit LTV speed protection to first-time homebuyers

Brian Landy, CFA | May 17, 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. This material does not constitute research.

Agency MBS investors often buy pools of high loan-to-value mortgages for prepayment protection when mortgage rates fall. A big reason these loans are less likely to refinance is that many are made to first-time homebuyers. These borrowers, at any loan-to-value ratio, are less likely to refinance than repeat buyers. So, investors paying a premium over TBA for high LTV pools should look for high shares of first-time homebuyers to maximize prepayment protection. But because first-time buyers also tend to turnover more slowly, so there is extension risk if mortgage rates increase.

Most purchase loans over 80 LTV are made to first-time homebuyers. In 2018 23.3% of conventional purchase loans up to 80% LTV went to first-time homebuyers, for example, compared to 49.8% of loans with LTV between 80% and 95% and 87.8% for loans between 95% and 97% LTV (Exhibit 1). First-time homebuyers are a growing share of the market, accounting for roughly 50% of all conventional purchases in 2022 and 2023, up about 3% from 2018. And roughly 97% of loans over 95% LTV were made to first-time buyers, many through Fannie Mae’s HomeReady, Freddie Mac’s Home Possible, and various state housing finance agencies.

Exhibit 1: Most high-LTV loans are made to first-time homebuyers.

FTHB: first-time homebuyer. Conventional 30-year, owner-occupied, purchase loans only.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.

Example of 2018 vintages

Prepayment speed data suggests that the high concentration of first-time homebuyers is most of the reason high LTV pools are less refinanceable than low LTV pools (Exhibit 2). Take prepayments in 2018 3.5%s through 4.5%s during the first year of the Covid refinance wave, for example. We can split those speeds by LTV and, within LTV, by whether the loan went to a first-time or repeat buyer. The repeat buyers prepaid faster than the first-time buyers in every category, while speeds of both types of buyers was often similar across LTV categories.

Exhibit 2: 2018 vintage first-time homebuyers prepaid slower than repeat buyers during the Covid refinance wave.

Performance from April 2020 through March 2021. Conventional 30-year, owner-occupied, purchase loans only.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.

Example of 2022 vintages

The results are similar for the 2022 vintage after rates dropped briefly in late 2023 (Exhibit 3). This refinance event was not very strong, especially in conventionals—note that the y-axis reaches 15 CPR compared to 60 CPR in the Covid wave. Speeds were again remarkably similar across LTV categories, but first-time buyers prepaid much slower than repeat buyers. Most of the refi protection probably occurred in the 6.5% coupon, while slower turnover from first-time buyers is driving the speed differences in the lower coupons.

Exhibit 3: 2022 vintage first-time homebuyers prepaid slower than repeat buyers in early 2024.

Performance from January 2024 through April 2024. Conventional 30-year, owner-occupied, purchase loans only.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.

Example of 2023 vintages

The 2023 vintage also shows a large speed difference between first-time and repeat buyers, although there is a more sensitivity to LTV (Exhibit 4). The largest speed difference was in the 7% coupon for loans with 80% to 95% LTVs—the first-time buyers prepaid around 12 CPR while the repeat buyers prepaid over 20 CPR. There was a modest increase in speeds at lower LTVs, suggesting that LTV adds a little prepay protection regardless of the type of homebuyer, but the 2022 vintage data above suggests that this difference fades after a year or two.

Exhibit 4: 2023 vintage first-time homebuyers prepaid slower than repeat buyers in early 2024.

Performance from January 2024 through April 2024. Conventional 30-year, owner-occupied, purchase loans only, at least 6 months seasoned.
Source: Fannie Mae, Freddie Mac, Santander US Capital Markets.

Looking at the 2018 and 2022 vintage prepayment speeds by LTV, without further separating by first-time homebuyer, shows that high LTV loans prepay slower. However, much of the reason is because high LTV pools contain more first-time homebuyers. It is the type of borrower, not the LTV, that is pushing those speeds slower. Investors should look for high LTV pools with high shares of first-time homebuyers to maximize the prepayment protection of those pools. And first-time homebuyers should provide prepayment protection in lower LTV pools, too. However, first-time homebuyers also tend to prepay slowly in high-rate environments, a topic explored here, so pools of these borrowers and high LTV pools could underperform TBA if rates move higher.

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

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