By the Numbers
Barbelled drivers of fast speeds in prime jumbo
This material is a Marketing Communication and does not constitute Independent Investment Research.
Prepayment speeds on recent vintage prime jumbo deals have more than doubled since the fall, peaking at 45 CPR in December before falling modestly last month. The recent rise has been fueled by a combination of fast speeds on moderately seasoned loans and fairly elevated at-the-money speeds on newly originated collateral. Discount pass-throughs, sequentials and subordinate classes of these deals appear poised to benefit from these faster speeds.
Negative convexity looks to be on the rise in prime jumbo as prepayment speeds on higher WAC loans have risen from 20 CPR in September to 45 CPR in December before falling modestly last month to 35 CPR. Faster jumbo speeds have been fueled not only by falling conforming primary rates but a concurrent narrowing of the basis between conforming and jumbo rates. The basis between the two rates has averaged just 33 bp since the beginning of September. Several observations have seen the conforming to jumbo basis invert and go negative. And it currently sits at just 25 bp (Exhibit 1).
Exhibit 1: Jumbo speeds rise as basis to conforming rates narrow
Source: Santander US Capital Markets, ICE, Freddie Mac, Bloomberg LP
Focusing primarily on recent vintage cohorts, specifically the 2023 through 2025 vintages shows that fast speeds are due to somewhat of a barbelled effect. The 2023 and 2024 vintages are backed by loans that carry significant refinancing incentive, upwards of 100 bp. While the 2025 vintage is showing relatively elevated at-the-money speeds and is paying fast with fairly minimal amounts of incentive. 2024 vintage loans with a point of refinancing incentive are prepaying at nearly 70 CPR. The 2023 vintage appears to be showing some modest burnout on deeper in-the-money loans, but speeds are still quite fast, as 2023 vintage loans with 100 or 125 bp of incentive are prepaying at 50 CPR. At the opposite end of the WALA ramp, 2025 vintage loans with no incentive are prepaying 21 CPR, while loans with just 25 bp of incentive prepay at nearly 34 CPR (Exhibit 2).
Exhibit 2: Loans with substantial incentive and low WALA loans fuel elevated speeds
Source: Santander US Capital Markets, CoreLogic Loan Performance
Somewhat similar to the phenomenon observed in second liens, low WALA loans are ramping fast. Zero to two WALA loans securitized in prime jumbo trusts are prepaying at 17 CPR with no incentive and 25 CPR with just 25 bp of incentive. Somewhat surprisingly, purchase loans are driving these faster speeds. Zero to two WALA purchase loans with no incentive are prepaying at 18 CPR. One plausible explanation as to what may be driving these speeds is borrowers refinancing loans after making some cash outlay to perform renovations that they are able to recoup by refinancing the loan when the home is reappraised post-renovation (Exhibit 3).
Exhibit 3: Low WALA purchase loans drive elevated prepayments
Source: Santander US Capital Markets, CoreLogic Loan Performance
Playing the speed game in discount exposures
While fast speeds look likely to weigh on spreads in premium and interest-only classes of these deals, discount senior exposures and subordinates should be the clear beneficiaries. Discount 5.0% pass throughs and front sequentials are the best options at the top of the capital structure. The uptick in speeds look somewhat mispriced in the primary market as both 5.0% and 5.5% pass throughs are trading roughly 20/32s behind their respective TBA cohort. Given this, it appears both 5.5% pass throughs and senior mezzanine bonds, which generally carry 5.5% coupons, look susceptible to spread widening if speeds remain fast. More seasoned subordinate bonds that have already benefitted from some deleveraging via these elevated speeds look somewhat fully priced. Faster speeds on lower WALA deals may be less so, and investors down the capital structure should concentrate credit exposures in new issue rather than secondary subordinates.
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