By the Numbers
UWM gives a boost to FHA and VA refinancing
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.
A new program from United Wholesale Mortgage that pays brokers to do FHA and VA streamlined refinances has triggered some MBS repricing. The price difference between Ginnie Mae and Fannie Mae TBA pass-throughs dropped between 1.5/32s and 3.0/32s across the 5% to 7% coupons in response to a July 10 UWM announcement. But the market may be overestimating the effect on TBA speeds since UWM only accounts for 10% of recent multiple-issuer pools in most coupons.
The program, called Govy125, is available through September 3 and pays loan officers 125 bp of the origination loan amount to do FHA and VA refinances with UWM. This money could be used to help borrowers refinance that were otherwise not sufficiently in-the-money to do so.
Ginnie Mae MBS underperformed conventional MBS on Wednesday after the announcement (Exhibit 1). The price spread between the Ginnie II TBA and the UMBS TBA, known as the Ginnie–Fannie swap, fell in coupons from 5% through 7%, which potentially could see faster prepayments from this program. The biggest drops came in the 6.0% and 6.5% coupons, which are likely to have the largest share of borrowers that could be encouraged to refinance if the Govy125 incentive is used to lower the borrower’s prospective mortgage rate.
Exhibit 1. The Ginnie–Fannie swap dropped 2/32s to 3/32s in most coupons.
Change in Ginnie to Fannie swap from 7/9 to 7/10 close, in 32s.
Source: Yield Book, Santander US Capital Markets.
Unlike the other coupons, the 7.5% swap increased. This is likely because those loans are already so deep in-the-money that a lower mortgage rate shouldn’t have much effect on prepayment speeds. So, there would be little reason for loan officers to share any of the incentive payment with borrowers.
Model projections, however, suggest the effect on the G2SF TBA prices should have been smaller (Exhibit 2). The cuspiest coupons—6.0% and 6.5%—are only projected to drop 0.5/32s in value from this change. The 3-month CPR is projected to increase about 4.0 to 4.5 CPR in those coupons, while the long-term CPR only increases 0.2 to 0.3 CPR. The calculation assumes that any loan in the pool that was originally pools by UWM or was originated by a broker with another lender is subject to the elbow shift, while the remaining loans don’t prepay any faster. The effect of the program is muted since the faster loans only account for about 20% of most of these pools. And the premium coupons aren’t priced too far above par, which also mitigates the effect of temporarily faster speeds on value.
Exhibit 2. Model projections suggest the market overestimates the UWM impact
Each coupon has a representative pool at least 8 WALA, so the loans are seasoned enough to be eligible to refinance. The 125 bp incentive is turned into an elbow shift for each coupon based on the price spread to lower coupons. Broker % excludes UWM broker loans. Change in price and speeds calculated using the stated elbow shift for each coupon at constant OAS. The elbow shift lasts for 2 months and only applies to the portion of the pool that was sold by UWM or originated by a broker through another lender.
Source: Yield Book, Santander US Capital Markets.
The effect on UWM specified pools, many of which end up in CMOs, may feel more effect from this program since the speeds are not diluted by non-UWM loans. However, most of those pools carry other forms of prepay protection, like low loan size, which should help mute the effect of this program on their speeds.
New issue pools are unlikely to be affected by this program, since most of the loans will not be seasoned enough to get an FHA or VA streamlined refinance before the Govy125 program expires.
The most effected loans should be those sold by UWM and loans originated by brokers with other lenders (Exhibit 3). This shows servicers with at least $10 billion portfolios and at least 10% broker-originated loans. UWM’s loans are separated into groups by the current servicer. UWM didn’t place any restriction against refinancing the loans it currently services, so expect brokers to target those loans. Additionally, loans UWM no longer services could also be targeted, unless the mortgage servicing rights sale prohibits solicitation by UWM. And loans originated by brokers through other lenders may also be targeted, because those brokers may also have a relationship with UWM or be willing to start one to access this incentive.
Exhibit 3. Lenders with large broker exposure.
Source: Ginnie Mae, Santander US Capital Markets.
To receive the Govy125 incentive, brokers need to use at least one of two UWM products. The first is PA+, introduced in May 2023, which assigns a loan coordinator to handle various documentation tasks for the loan officer. The second is TRAC+, introduced in May 2024, which has UWM handle the tasks typically performed by a title company.
The Govy125 incentive is enough to pay for PA+ or TRAC+ on most loans (Exhibit 4). PA+ costs $595 for these government loan refinances, and the incentive covers that cost for a $47,600 loan, and the loan officer receives the excess for larger loans. TRAC+ is more expensive but has its own incentive that scales with loan size. The Govy125 incentive is enough to pay for TRAC+ for any loan at least $100,000, and it covers the cost of PA+ and TRAC+ for loans over $132,150. And this may be understating the amount the loan officer earns, since there may be savings from not using other documentation and title services.
Exhibit 4. Govy125 cash incentives to loan officers.
Source: United Wholesale Mortgage, Santander US Capital Markets.
It seems likely that UWMs primary goal is to market the PA+ and TRAC+ products to brokers. And it is possible that brokers have been less likely to use those products for FHA and VA streamline refinances, which are easier to process than other loans. Fortunately for investors the effect on MBS valuations should be relatively muted since the program only available for two months, but the next few Ginnie Mae speed prints could jump higher.
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