Independent Banker - November 2020 - 35

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Prepay comparison by collateral type - 1mo CPR
FNCL 3.0 - 2019 100% NY FNCL 3.0 - 2019 100% Investor FNCL 3.0 - 2019 LB 125 FNCL 3.0 - 2019 LB 150 FNCL 3.0 - 2019 LB 200 FNCL 3.0 - 2019
50
45
40
35
30
25
20
15
10
5
43
39
34
28
27
20
18
15
10
6
2 3 3 3 3
1
Jan 20
Feb 20
Mar 20
Apr 20
May 20
Jun 20
Jul 20
Aug 20
Sep 20
3 3 3
6
2 3 3 4
3
2
6
5
5 6
4
7 7
8
5
10
8 8 8
11
7
11 11 11
8
12
13
12
19
16
15 15
22
particular, the agency bond population,
meaning non-amortizing securities
issued by Fannie Mae, Freddie Mac and
the Federal Home Loan Bank, is about
40% smaller than in 2007.
Another is that community banks
are still right-sizing their tax-free
portfolios, following 2017's tax
reform. Tax-free municipal bond
holdings have shrunk by about 20%
in the past three years. In many cases,
community banks have snapped up
MBS in their place.
New to the discussion
Of course, it's no secret that mortgage
securities of all manner are on a prepayment
tear. Even bonds that would
appear to be insulated against " speeding "
have been setting records this
year. As an example, 15-year Fannie
Mae MBS with a stated ( " coupon " )
rate of 2.5% have been averaging
more than 30% constant prepayment
rate (CPR) since July, after posting
sub-10% CPRs until March.
In response, MBS pool assemblers
have been building securities whose
underlying collateral has some
features, which should be less prone
to refinance activity. The most logical
variable is outstanding loan balance.
Another variable that's less known,
but is no less correlated with slower
speeds, is that properties located
in New York state are very difficult
to refinance. New York state and
its counties charge certain taxes on
refinancings that can be prohibitive.
New pools are being assembled
every day whose collateral is made
up exclusively of loans that have,
for example, maximum individual
loan balances of $150,000, or whose
properties are 100% located in New
York state.
Using September 2020 as a
barometer, we can see the dramatic
impact that these certain loan
characteristics can produce. In that
month, all Fannie Mae 30-year 3%
MBS prepaid at an annual rate of 43%
CPR, which is a record high.
However, if we look at that same
cohort, but with maximum loan
balances of $150,000, the speeds
dropped to just 15%. As for pools
with all New York state properties,
the CPR was just 12%. This was the
continuation of a trend that began
in April.
Investors beware: These specific
pools will have higher prices
than generics. That's not a casual
comment in a market where five, six
and even seven points of premium
are commonplace. However, most
prepayment models, when applied
to the specific loan characteristics,
create favorable risk-reward
outcomes for these securities, even
with the modestly higher prices.
Most community banks' bond portfolios
are currently hurtling along at
a breakneck pace. Paying close attention
to the collateral of your next MBS
purchases can slow things down to a
maneuverable pace. Portfolio managers
in 2020 are all too glad to pump
the brakes on their cash flow.
Education on Tap
Webinar series
continues
ICBA Securities and its
exclusively endorsed broker,
Vining Sparks, will conclude
its 2020 Community Banking
Matters series on Nov. 10 at
10 a.m. CST. Tom Mecredy will
discuss M&A and Community
Bank Valuation Update.
Visit viningsparks.com
to register.
independentbanker.org Q 33
CPR

http://www.viningsparks.com http://www.independentbanker.org

Independent Banker - November 2020

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