By the Numbers
Correspondents, geography drive the spike in jumbo speeds
This material is a Marketing Communication and does not constitute Independent Investment Research.
Prepayment speeds in prime jumbo MBS have surged in recent months with newer high WAC cohorts paying around 40 CPR last month. The jumbo market has become increasingly negatively convex as loans with balances eligible for agency MBS have spiked in recent years. Loans originated through correspondent channels and in states with stronger home price appreciation look to be the leading culprits. With prime speeds likely to remain fast, investors should look to discount pass-throughs and shifting interest subordinates to take advantage of rising prepayments.
The jumbo market is somewhat bimodal, composed of low gross WAC Covid vintage deals and higher gross WAC deals originated in 2023 and beyond. And the steady increase in prepayments over much of the past year has simply been due to growing at-the-money issuance. The growing population of higher WAC loans have caused cohort level prepayment rates to double over the past two remittance cycles, surging by roughly 5 CPR in October and November (Exhibit 1).
Exhibit 1: Jumbo speeds surge in recent months
Source: Santander US Capital Markets, CoreLogic Loan Performance
An S-curve analysis of recent vintage jumbo deals shows that relatively small amounts of refinancing incentive are driving substantial increases in prepayment speeds. At-the-money speeds on 2023 through 2025 vintages range from 18 CPR to 20 CPR. Somewhat surprisingly, 2023 vintage loans may be showing signs of early-stage burnout as they are far less sensitive to 50 bp of refinancing incentive than the 2024 and 2025 vintage cohorts (Exhibit 2). The 2023 vintage is prepaying 10 CPR slower than later-vintage collateral given 50 bp of refinancing incentive.
Exhibit 2: 2023 vintage prime loans may be showing signs of early-stage burnout
Source: Santander US Capital markets, CoreLogic Loan Performance
Correspondent and higher HPA collateral driving faster speeds
A shelf level analysis of 2025 vintage collateral shows that shelves that source loans through conduit correspondent channels like JPMMT and OBX exhibited some of the fastest speeds last month. Conversely, originators shelves with larger concentrations of loans originated through retail channels, like Guaranteed Rate’s jumbo program, exhibited some of the slowest one-month speeds (Exhibit 3).
Exhibit 3: Newly originated correspondent loans prepaid faster last month
Source: Santander US Capital markets, CoreLogic Loan Performance
Cutting recent vintage jumbo collateral by origination channel shows that loans originated through correspondent networks have prepaid significantly faster over the past two months than those originated through both retail channels and somewhat surprisingly, those originated through broker networks (Exhibit 4). Speeds on correspondent originations rose to 19 CPR and 26 CPR sequentially in October and November with retail and broker originations prepaying roughly 4 CPR to 5 CPR slower over the same horizon.
Exhibit 4: Correspondent loans prepay faster than retail and TPO
Source: Santander US Capital markets, CoreLogic Loan Performance
Another material driver of speeds appears to be geography where loans in states that are still experiencing material home price growth are prepaying faster than others. Prepayments on loans in California and New Jersey were significantly faster than those of other states in the past two remittance cycles (Exhibit 5). California-based jumbo loans prepaid at 43 CPR and 56 CPR over the past two months while jumbo loans in New Jersey prepaid at 27 CPR and 46 CPR.
Exhibit 5: New Jersey and California loans driving elevated jumbo prepayments
Source: Santander US Capital markets, CoreLogic Loan Performance
Elevated prepayments in these two states are consistent with longer term trends as prepayment S-curves for these two states are much steeper than other major contributors to prime trusts. California loans show significant sensitivity to just 25 bp of incentive with speeds increasing from 27 CPR at-the-money to nearly 39 CPR when 25 bp in-the-money. Prepayments on California loans peak at 100 bp in-the money where they have prepaid at nearly 65 CPR.
New Jersey based jumbo loans show a more muted response to smaller amounts of incentive, with speeds increasing by just 4 CPR given 25 bp of moneyness. Their S-curve steepens substantially when they roll deeper in-the-money but do pay substantially slower than California loans given 100 bp of incentive (Exhibit 6).
Exhibit 6: California based jumbo loans have the steepest S-curve
Source: Santander US Capital markets, CoreLogic Loan Performance
Investment implications
As the GSEs continue to push conforming loan balances higher every year, the jumbo universe has become increasingly negatively convex. The combination of higher loan balances and heavier debt burdens likely leave borrowers with a more acute response to smaller amounts of refinancing incentive than in years past. Given this paradigm shift, investors should position accordingly for growing amounts of negative convexity in the prime cohort. Investors at the top of the capital structure should skew towards discount pass throughs with an eye towards originators that have historically exhibited relatively fast out-of-the-money speeds if long rates rise and the curve steepens. Growing negative convexity and faster speeds may prove a windfall for credit investors as it will drive faster deleveraging of shifting interest structures, allowing subordinate bonds to tighten as they roll down the credit curve.
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