By the Numbers
Faster speeds, more burnout in VA loans
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Loans guaranteed by the Veterans Administration typically have the fastest housing turnover in discount agency MBS. And when rates fell briefly last September, those borrowers were the most apt to take advantage of lower rates to move. These loans account for nearly 50% of some discount Ginnie Mae multiple issuer pools, improving the prepayment behavior of discount Ginnie Mae pools compared to their conventional counterparts. On the other hand, VA loans typically refinance much faster than FHA and conventional loans, hurting the value of pools priced above par. But the fast speeds bring fast burnout, improving the convexity of pools that have been through refinance waves.
Getting the exposure
The 5.5% 2023 multiple-issuer pools, roughly $58 billion in current balance, benefit from faster VA turnover and VA burnout. The coupon is currently priced below par so faster turnover adds value. And the cohort was refinanceable in late 2024 so some of the most negatively convex VA loans had an opportunity to prepay. That should provide some prepay protection relative to TBA if rates rally again. The benefits could also accrue to specified pools in this coupon, although they typically contain fewer VA loans.
The story of turnover
VA loans continue to top FHA and conventional loan speeds in discount MBS pools and widened the gap in late 2024 (Exhibit 1). The chart shows prepayment speeds, excluding Ginnie Mae buyouts, for 2.5% and 3.0% pools from 2021. VA turnover has been roughly 2 to 4 CPR faster than FHA and conventional turnover over this time. Turnover in all three programs resisted the typical seasonal slowdown over the final few months of 2024. The fast VA turnover helps lift the speeds of discount Ginnie multiple issuer pools compared to comparable conventional pools, since VA loans can account for as much as 50% of pool balances.
Exhibit 1. Discount VA loans from 2021 prepay faster than conventional and FHA loans.
Fixed-rate 30-year loans, at least $300,000 original loan size, at least 8 months seasoned. Conventional loans are also owner-occupied, FICO>700, Orig LTV≤80.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
The story of burnout
VA loans prepaid faster than conventional and FHA loans in the two short refinance waves in 2024 (Exhibit 2). This shows speeds on loans in 6.5% pools from the 2022, 2023, and 2024 vintages. The 2023 vintage is split into loans from early 2023 that were seasoned enough to refinance in January 2024, and loans from late 2023 that were not seasoned enough. The loans that were able to prepay in early 2024 reached speeds over 80 CPR. But later in the year those speeds fell to just over 60 CPR despite lower mortgage rates compared to the earlier refinancing period. However, the VA loans that were unable to refinance at the start of the year were able to exceed 80 CPR and 90 CPR late in the year.
Exhibit 2. VA 6.5%s prepaid fastest in the brief 2024 refinance waves, but already show some signs of burnout.
Fixed-rate 30-year loans, at least $300,000 original loan size, at least 8 months seasoned. Conventional loans are also owner-occupied, FICO>700, Orig LTV≤80.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
Speeds on FHA and conventional loans were slower than the VA speeds at the start of the year, and burnout is not as strong in either program. The FHA loans that could participate in both refi waves showed some burnout—they were slower in late 2024, and slower than less seasoned collateral. The conventional results were mixed—the loans prepaid faster in the second refi wave, but still slower than less seasoned loans.
The picture is similar in 7.0%s (Exhibit 3). VA speeds dropped sharply between the two refinance waves for the more seasoned loans, while less seasoned loans prepaid very fast late in the year. The burnout is strong enough that the speeds on the burnt-out VA loans were comparable to speeds on conventional loans.
Exhibit 3. VA 7.0%s show even stronger burnout.
Fixed-rate 30-year loans, at least $300,000 original loan size, at least 8 months seasoned. Conventional loans are also owner-occupied, FICO>700, Orig LTV≤80.
Source: Fannie Mae, Freddie Mac, Ginnie Mae, Santander US Capital Markets.
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