Loans Under $200K Prepay Slowly—But Not in Every State

In agency pools, loans with balances below $200,000 offer prepayment protection (i.e., they prepay more slowly) relative to loans with higher balances. Servicers typically segregate these loans into specified pools that trade at a premium over TBA-deliverable pools. But the prepayment protection isn’t homogenous and varies significantly by state.1

The following chart compares the S-curve for all TBA “non-spec” borrowers2 with borrowers with loan balances between $175k and $200k, the traditional range for pools with “200k-max loan size.”

Clearly, 200k-max loan size offers prepayment protection over non-spec pools. To determine the extent to which this protection varies by state, we used Edge to segregate all $175-200k loans by state and selected the three fastest and slowest states.3

On the slow side, states including Pennsylvania, New Jersey, and Maryland are significantly slower than average (red dash).

s curve slow states.png

On the fast side, states including Colorado, Michigan, Utah, and Wisconsin were significantly faster than average (red dash).

s curve fast states.png

In fact, $200k-max Colorado loans paid as fast or faster than the average “non-spec” category, most likely due to strong economic activity and robust home-price growth.

s curve colorado.png

The upshot: when looking at pools in the $200k-max sector, it makes sense to be aware of the geographic distribution. There are several states producing speeds significantly above “generic” $200k-max speeds.

summary of states and UPB.PNG

[1] This analysis can also be done by servicer. See RiskSpan for a detailed analysis.
[2] “Non-spec” excludes borrowers with high LTV, lower loan balances, low-FICO borrowers, and NY/FL borrowers.
[3] To select fastest and slowest states, we focused on prepayments when loans were at least 100bp in the money from a refinancing standpoint. A state must have had at least $40B UPB to be included. We excluded NY and FL loans.