By the Numbers
Screening for faster out-of-the-money speeds in private MBS
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.
High rates have continued to push significant swaths of both prime jumbo and non-QM MBS well below par. The resulting depressed levels of baseline housing turnover have investors looking for unique loan attributes with elevated out-of-the-money speeds that will generate excess returns. The agency specified pool market provides a valuable roadmap when screening for these loan attributes as certain geographies like Florida and lower FICO loans offer turnover upside.
Speeds on deeply out-of-the-money collateral across the two main sources of private label issuance, non-QM and prime jumbo, have remained slow. Broadly speaking, loans securitized in prime jumbo trusts have exhibited worse convexity and a substantially steeper prepayment S-curve than collateral securitized in non-QM deals. After adjusting for risk-based pricing, the prime jumbo loans prepay 4 CPR slower when deeply out-of-the-money and 15 CPR faster when both cohorts of loans have more than a point of refinancing incentive (Exhibit 1).
Exhibit 1: Jumbo convexity markedly worse than non-QM over the past two years
Source: Santander US Capital Markets, CoreLogic LP
Florida’s faster across cohorts
One well-articulated specified story in agency space is 100% Florida specified pools. Concentrated exposure to Florida loans can cost pool buyers in agency MBS price premiums of a point or more over TBA on deeper out-of-the-money coupons as these loans have consistently prepaid faster than the broader cohort. While investors in private MBS cannot get exclusive exposure to Florida loans, they can concentrate discount exposure in shelves with higher concentrations of those loans at little to no material pay up. In non-QM MBS, the Angel Oak (AOMT) and A&D Mortgage (ADMT, IMPRL) shelves tend to have more meaningful concentrations of Florida loans given those originators’ geographic footprint.
Across both the non-QM and jumbo cohorts, Florida loans have offered faster out-of-the money speeds when compared to the broader cohort. In non-QM MBS, Florida loans are paying roughly 10 CPR versus 8 CPR for the cohort. Assuming a $85 price on a roughly 2.0% coupon, 2021 vintage ‘AAA’, that 2 CPR difference translates to as much as 70 bp of spread and yield when run to maturity. In jumbo space, Florida loans pay twice as fast as cohort with Florida loans paying nearly 7 CPR with the broader cohort playing slower than 4 CPR (Exhibit 2).
Exhibit 2: Florida loans faster in non-QM and jumbo
Source: Santander US Capital Markets, CoreLogic LP
Low FICO faster out-of-the-money too
Consistent with agency observations, weaker credit borrowers have consistently paid faster out-of-the-money in private MBS as well. Low FICO non-QM loans, which, for the purpose of this analysis are being defined as borrowers with FICO scores between 640 and 660, have prepaid roughly 3.5 CPR faster than the cohort speed of 8 CPR. The advantage in jumbo is more muted, as borrowers with FICOs between 660 and 680 in prime space paid 2.5 CPR faster than cohort (Exhibit 3).
Faster prepayments in lower FICO loans, particularly in non-QM, can be borne of a variety of factors. Lower FICO loans in non-QM space will generally carry substantial loan-level pricing adjustments. And if borrowers experience meaningful credit curing coupled with home price appreciation, it could shift them from the corner of a loan level pricing grid to the center, effectively shifting the refinancing elbow for that loan. Lower FICO borrowers are also more likely candidates to take out debt consolidation loans that could trigger a prepayment. Furthermore, lower FICO borrowers have historically exhibited a higher probability of delinquency and inconsistent payment velocity, seriously delinquent borrowers in the majority of non-QM transactions generally have substantial paid-in and mark-to-market equity, giving them the optionality to sell the come and release trapped equity rather than face foreclosure.
Exhibit 3: Low FICO loans faster as well
Source: Santander US Capital Markets, CoreLogic LP
Rising home prices drive faster prepayments as well
Another potentially unique driver of out-of-the-money speeds in the private MBS are loans with substantial amounts of equity in the form of low mark-to-market CLTVs. Ascertaining an accurate mark-to-market-CLTV on seasoned loans in agency MBS can be somewhat difficult given less complete disclosures of borrower ZIP codes. In the private label market, investors have loan-level data down to a five-digit ZIP code, providing a better ability to calculate a current mark-to-market combined LTV when pairing the borrower’s paid-in equity with the MSA-based or zip code based monthly home price appreciation over the life of the loan.
As previously noted, large stores of borrower equity can supersede both negative refinancing incentive and the presence of prepayment penalties on non-QM investor loans given borrowers’ willingness to refinance underwater loans to release large stores of equity that can be reinvested. Faster out-of-the-money speeds on prime collateral are evident as well, although they are substantially more volatile with much more pronounced slowdown in speeds as these loans fall further out-of-the-money (Exhibit 4)
Exhibit 4: Large stores of borrower equity can push prepayments higher
Source: Santander US Capital Markets, CoreLogic LP
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
