By the Numbers
Spread and convexity in pools backed by second homes, investor loans
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.
MBS investors looking for less commonly trafficked stories that offer an attractive OAS compared to TBA should consider pools backed by second homes and, to a lesser degree, investor loans. These pools have attractive prepayment profiles at modest price premiums to TBA. Supply of pools backed by second homes is limited, however. That may apply to their liquidity, too.
Stacking up S-curves
Comparing relative convexity across different MBS pools starts with normalizing refinancing incentive. Moving from owner-occupied to non-owner-occupied loans can come with GSE loan-level pricing adjustments of as much as four points for higher LTV borrowers. Given this, any S-curve analysis must measure incentive after accounting for that risk-based pricing or SATO. Even after discounting incentive for higher LLPAs, non-owner-occupied loans offer substantially more call protection than certain higher loan balance cuts. Prepayment S-curves for loans backed by second homes are comparable to loans with original balances between $200,000 and $250,000 and are substantially flatter than those of loans with original balances between $250,000 and $300,000.
Furthermore, second home loans tend to prepay faster than loan balance when out-of-the-money. Given 150 bp of negative incentive, second homes have prepaid at 10 CPR while loan balance cuts analyzed prepaid 2 CPR slower. Faster out-of-the-money speeds on second homes—and to some-extent on investor loans—are likely largely attributable to less pronounced lock-in effect as individuals can sell second homes and investment properties without an immediate need to finance a new property (Exhibit 1).
Exhibit 1: Stacking up S-curve across NOO and loan balance collateral
Source: Santander US Capital Markets, eMBS, Fannie Mae, Freddie Mac.
Note: S-curve observations Jan 2022-August 2025 controlled for loans 12-36 WALA to minimize the effect of both seasoning and burnout.
Comparing OAS advantage
Our relative value framework looks to maximize OAS advantage while trying to control for elevated pay-up risk. Using levels from last week’s Fannie Mae cash window list and focusing on 5.5% and 6.0% cohorts shows that second homes offer the largest OAS pick compared to TBA in 5.5%s, better than higher loan balance cuts and borrower credit and geography stories. In 6.0%s, second homes fall just behind low FICO pools in terms of OAS advantage but second home pools are roughly a half-point lower in pay-up than low FICO 6.0% (Exhibit 2).
Exhibit 2: Measuring OAS advantage and pay ups across specified stories
Source: Santander US Capital Markets, Fannie Mae
In the 5.5% cohort, less than a handful of stories offer a material OAS advantage compared to TBA, while the overwhelming majority offer anywhere from a 3 bp to 7 bp pickup. Given the somewhat crowded relative value proposition, investor pools stand out as offering a comparable OAS advantage to other stories with far less pay up risk. Investor 5.5%s cleared in the context of an 11/32 pay up, translating to a roughly 5 bp OAS advantage. By comparison, the $250,000 max pool cleared in the context of a 29/32 pay up with just a 3 bp advantage over TBA. Investor and second homes look attractive versus other low pay up stories such as high LTV pools as well as these high LTV loans may be susceptible to higher delinquency and default rates, driving elevated buyout speeds if the economy were to weaken materially. The value proposition is substantially similar in the 6.0% cohort where second homes stick out as offering a more meaningful OAS pickup than other stories while investor pools line up with other stories at appreciably lower pay ups.
An eye towards supply…
One binding constraint and a potential reason why second homes in particular, trade at relatively low pay ups is the somewhat limited supply of these loans, making at somewhat difficult to establish a large exposure quickly. Issuance of pools backed by second homes is currently running between $600 million and $1 billion a month while investor pools are being created at roughly triple that volume. Given this, second home pools may be better suited for buy-and-hold investors who do not need the liquidity associated with pool stories with a much larger float or those willing to sell some liquidity in exchange for what it appears to be relatively inexpensive convexity Thank(Exhibit 3).
Exhibit 3: Monthly issuance of non-owner-occupied collateral
Source: Santander US Capital markets, eMBS, Fannie Mae Freddie Mac
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